The margins of labour costs adjustment: Survey evidence from European firms. National Bank of Belgium Working Paper No. 183, November 2009

Babecky, Jan and Du Caju, Philip and Kosma, Theodora and Lawless, Martina and Messina, Julian and Room, Tairi. (2009) The margins of labour costs adjustment: Survey evidence from European firms. National Bank of Belgium Working Paper No. 183, November 2009. [Working Paper]

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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.

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