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Wages and the Risk of Displacement
J31 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc.
J65 - Unemployment Insurance; Severance Pay; Plant Closings
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. The results show that the fear of job loss generates bargaining 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.