Maria Olsson, Uppsala University (Job Market Seminar)

"Labor Cost Adjustments During the Great Recession"

Abstract

This paper uses detailed Swedish micro-data to analyze how firms adjusted their labor costs in response to the large drop in aggregate demand during the Great Recession. For identification, I exploit the fact that the recession primarily hit export-dependent firms in Sweden. The results show that exposed firms were able to curb the rate of wage increases by a magnitude in line with existing micro-evidence of co-movements between individual firms' profits and their workers' wages (i.e. rent-sharing). In spite of this, I find that the dominant part of labor cost adjustments came through reductions in employment through separations into unemployment. For workers, the main source of earnings losses was therefore not the reductions in wages, but the increased rate of job-separations into unemployment. This suggests that wage rigidity contributes to unemployment and earnings fluctuations. Further evidence indicates that the exact details of wage-setting institutions affects the choice between wage and employment adjustments: workers covered by union contracts that provided individual workers with guaranteed wage increases experienced more separations in response to the fall in demand.

Contact person: Emiliano Santoro