Wages and the risk of displacement

No 1159, Working Paper Series from European Central Bank

Abstract: In this paper a simultaneous-equations model of firm closing and wage determination is specified in order to analyse how wages adjust to unfavorable product demand shocks that raise the risk of displacement through firm closing, and to what extent an exogenous wage change affects the exit likelihood. Using a longitudinal matched worker-firm data set from Portugal, the estimation results suggest that, under the existence of noncompetitive rents, the fear of job loss leads workers to accept wage concessions, even though a compensating differential for the ex ante risk of displacement might exist. A novel result that emerges from this study is that firms with a higher incidence of minimum wage earners are more vulnerable to adverse shocks due to their inability to adjust wages downward. Indeed, minimum wage restrictions were seen to increase the failure rates. JEL Classification: J31, J65

Keywords: concessions; displacement risk; wages (search for similar items in EconPapers)
Date: 2010-02
New Economics Papers: this item is included in nep-lab
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Related works:
Chapter: Wages and the Risk of Displacement (2008)
Working Paper: Wages and the Risk of Displacement (2006)
Working Paper: Wages and the Risk of Displacement (2003)
Working Paper: Wages and the Risk of Displacement (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101159

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