Staggered wages, unanticipated shocks and firms’ adjustments

Abstract

This paper studies the employment and wage effects of contract staggering, i.e., the staggered nature in which wages adjust to changes in the economic environment. Our analysis is based on a large matched employers employees dataset merged to collective agreements in the Netherlands, a country in which collective bargaining is dominant and contract staggering is relatively pervasive. By exploiting exogenous variation in the start dates of collective agreements around the Great Recession, we estimate the causal effect of increases in base wages mandated by collective agreements signed right before the shock on labour cost adjustments of firms. Our main result is that contract staggering has, on average, no real effect on employment. We find significant employment losses only in sectors covered by contracts with duration larger than thirty months, a rigidity much higher than that assumed in macroeconomic models including staggered wages. Instead, we show that firms were able adjust labour costs by curbing other pay components such as bonuses and benefits and incidental pay.