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Flexible wage components as a source of wage adaptability to shocks:evidence from European firms, 2010–2013
C81 - Methodology for Collecting, Estimating, and Organizing Microeconomic Data
J30 - General
J32 - Nonwage Labor Costs and Benefits; Private Pensions
P5 - Comparative Economic Systems
This paper provides evidence on the role of flexible wage components as a channel for firms to adjust costs in case of the adverse shocks. It uses data from a firm-level survey for 25 European countries that covers the period 2010–2013. We find that firms subject to nominal wage rigidities, which prevent them from adjusting base wages, are more likely to cut flexible wage components in order to adjust labour costs when needed. Thus firms use flexible wage components as a buffer to overcome base wage rigidity. More generally, when base wages are able to adjust to negative shocks, the flexible wage components also react and their reaction is stronger than that of base wages.