The Margins of Labour Cost Adjustment: Survey Evidence from European Firms

Babecký, Jan; Du Caju, Philip; Kosma, Theodora; Lawless, Martina; Messina, Julian; Room, Tairi

doi:10.2139/ssrn.1498987

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The Margins of Labour Cost Adjustment: Survey Evidence from European Firms

ECB Working Paper No. 1106

41 Pages Posted: 14 Nov 2009

See all articles by Jan Babecký

Martina Lawless

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Tairi Room

Bank of Estonia

Date Written: November 12, 2009

Abstract

Firms have multiple options at the time of adjusting their wage bills. However, previous literature has mainly focused on base wages. We broaden the analysis beyond downward rigidity in base wages by investigating the use of other margins of labour cost adjustment at the firm level. Using data from a unique survey, we find that firms make frequent use of other, more flexible, components of compensation to adjust the cost of labour. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by firm and worker characteristics.

Keywords: labour costs, wage rigidity, firm survey, European Union

JEL Classification: J30, C81, P5

Suggested Citation: Suggested Citation

Babecky, Jan and Du Caju, Philip and Kosma, Theodora and Lawless, Martina and Messina, Julián and Room, Tairi, The Margins of Labour Cost Adjustment: Survey Evidence from European Firms (November 12, 2009). ECB Working Paper No. 1106, Available at SSRN: https://ssrn.com/abstract=1498987 or http://dx.doi.org/10.2139/ssrn.1498987