Wage Structure, Employment and Efficiency

The paper represented in this ZEW Research Seminar documents new facts about the relationship between flexible wages and firm performance using a unique matched employer-employee database from Hungary. Firms providing flexible wage components adjust total wage compensation more to revenue shocks than firms without flexible wages. Nevertheless, employment responses to revenue shocks are the same at firms with and without flexible wage components. These findings also hold in the case of aggregate shocks and during the Great Recession. These results suggest that wage flexibility does not attenuate employment responses to a negative revenue shock. Finally, the author discusses the possible explanations for the empirical findings.