Wages, labor or prices : How do firms react to shocks ?

Survey results in 15 European countries for almost 15,000 firms reveal that Belgian firms react
more than the average European firm to adverse shocks by reducing permanent and temporary
employment. On the basis of a firm-level analysis, this paper confirms that the different reaction
to shocks is significant and investigates what factors explain this difference. Although the
explanatory value of the variables is limited, most of the explanatory power of the model being
associated with the dummy variables coding for firm size, sector and country, the variables
investigated provide valuable information. The importance of wage bargaining above the firm
level, the automatic system of index-linking wages to past inflation, the limited use of flexible pay,
the high share of low-skilled blue-collar workers, the labor intensive production process as well as
the less stringent legislation with respect to the protection against dismissal are at the basis of the
stronger employment reaction of Belgian firms. On the contrary, employment is safeguarded by
the presence of many small firms and a wage cushion. Read the complete Research Paper from the National Bank of Belgium here.