Wages and the Risk of Displacement

34 Pages Posted: 10 Mar 2010

See all articles by Anabela Jesus Moreira Carneiro

Anabela Jesus Moreira Carneiro

Universidade do Porto - Faculdade de Economia (FEP)

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

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Date Written: February 2010

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.

Keywords: wages, displacement risk, concessions

JEL Classification: J31, J65

Suggested Citation

Carneiro, Anabela Jesus Moreira and Portugal, Pedro, Wages and the Risk of Displacement (February 2010). ECB Working Paper No. 1159, Available at SSRN: https://ssrn.com/abstract=1551875

Anabela Jesus Moreira Carneiro (Contact Author)

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

Pedro Portugal

Bank of Portugal - Research Department ( email )

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Lisbon 1150-012
Portugal
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085
Portugal

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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