Wages and the Risk of Displacement

24 Pages Posted: 26 Jan 2006

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: January 2006

Abstract

In this paper a simultaneous-equations model of firm closing and wage determination is developed in order to analyse how wages adjust to unfavorable shocks that raise the risk of displacement through firm closing, and to what extent a wage change affects the exit likelihood. Using a longitudinal matched worker-firm data set from Portugal, the results show that the fear of job loss generates wage concessions instead of compensating differentials. A novel result that emerges from this study is that firms with a higher incidence of minimum wage earners are more vulnerable to adverse demand shocks due to their inability to adjust wages downward. In fact, 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 (January 2006). IZA Discussion Paper No. 1926, Available at SSRN: https://ssrn.com/abstract=878334

Anabela Jesus Moreira Carneiro

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

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Pedro Portugal (Contact Author)

Bank of Portugal - Research Department ( email )

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New University of Lisbon

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IZA Institute of Labor Economics

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