Micro Foundations for Wage Flexibility: Wage Insurance at the Firm Level*
We are grateful to Rob Alessie, Dan Hamermesh, Marie‐Claire Villeval, and the anonymous referees for valuable comments. We thank Lorenzo Capellari for having provided his presentation to the 5th UK meeting of Stata users on minimum distance estimation. The first author acknowledges the support of the Barcelona GSE Research Network and of the Government of Catalonia. The second author acknowledges financial support from Fundação para a Ciência e a Tecnologia, under grant SFRH/BD/5114/2001. Part of this work was carried out while MP was visiting IZA Bonn, whose support is gratefully acknowledged. We are also thankful to the Ministry of Labor and Social Solidarity for access to data.
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Abstract
To what extent do firms insulate their workers' wages from fluctuations in product markets? Which firm and worker attributes are associated with wage flexibility at the micro level? We first rely on Guiso, Pistaferri and Schivardi (2005) to estimate dynamic models of sales and wages, finding that in Portugal, workers' wages respond to permanent shocks on firm performance, as opposed to transitory shocks. We then explore the factors associated with wage flexibility, finding that collective bargaining and minimum wages are associated with higher wage insurance by the firm, while the threat of firm bankruptcy reduces it. Managers receive less protection against permanent shocks than other workers.
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