The analysis focuses specifically on firm’s reactions to (common) cost-push shocks: an increase in the cost of an intermediate input (e.g. an oil price increase), and an increase in wages (for example due to contracts bargained at higher levels). The respondents were asked to assess the relevance of four different adjustment strategies: (1) an increase in prices, (2) a reduction in profit margins, (3) a reduction in output and (4) a reduction in costs. Unless they rated ‘cost reduction’ as completely irrelevant, respondents were additionally asked to indicate how they would try to reduce costs, choosing between reduction of base wages, of flexible wage components, of permanent or temporary employment, of hours worked per employee and of non-labour costs.
This paper’s empirical approach is based on a partial equilibrium perspective on firms’ optimal employment strategies, focusing on the interaction between shocks and price, employment, and wage adjustment in a “right to manage” situation, where employment and hours are chosen by firms (possibly subject to hiring and firing costs), while wages may be bargained collectively. Reported probit estimations show that the relative intensity and the character of price vs. cost and wage vs. employment adjustments in response to cost-push shocks depend, in theoretically sensible ways, on the intensity of competition in firms’ product markets; on the composition of the work force; on the importance of collective wage bargaining; and on other structural (e.g., labour share, sectoral indicators, etc.) and institutional (e.g. strictness of employment protection legislation) features of firms and of their environment. The estimated coefficients allow for assessing the implications of possible labour market policy reforms and structural convergence in Europe and in the euro area, contrasting the aggregate implications of currently observed adjustment strategies to those of counterfactual configurations of unionisation and product market competitiveness patterns.