Wage-Setting Constraints and Firm Responses to Demand Shocks

TL;DR

This paper examines how institutional wage-setting constraints influence firm responses to demand shocks, using a comparative analysis across Portugal, Norway, and Colombia to reveal their impact on firm behavior and wage-setting power.

Contribution

It introduces a framework linking wage-setting constraints to firm responses and provides empirical evidence across three countries with different institutional environments.

Findings

Wage constraints significantly shape firm responses to demand shocks.

Heterogeneous shock responses are explained by institutional differences.

Implications for rent-sharing estimates and wage-setting power are discussed.

Abstract

This paper investigates how institutional wage-setting constraints, such as a national minimum wage or collectively bargained wages, affect firm responses to demand shocks. We develop a framework to interpret heterogeneous shock responses that depend on the constraints firms face, and provide empirical evidence on the relevance of these constraints in shaping firm behavior across three countries with different institutional settings: Portugal, Norway, and Colombia. We discuss the implications of our findings for conventional estimates of rent-sharing and employer wage-setting power.