Wages and the Risk of Displacement

Anabela Carneiro, Pedro Portugal

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

2 Citations (Scopus)


In this paper a simultaneous-equations model of firm closing and wage determination is specified in order to analyse how wages adjust to unfavorable product demand shocks that raise the risk of displacement through firm closing, and to what extent an exogenous wage change affects the exit likelihood. Using a longitudinal matched worker-firm data set from Portugal, the estimation results suggest that, under the existence of noncompetitive rents, the fear of job loss leads workers to accept wage concessions, even though a compensating differential for the ex ante risk of displacement might exist. A novel result that emerges from this study is that firms with a higher incidence of minimum wage earners are more vulnerable to adverse shocks due to their inability to adjust wages downward. Indeed, minimum wage restrictions were seen to increase the failure rates.

Original languageEnglish
Title of host publicationWork, Earnings and Other Aspects of the Employment Relation
Number of pages26
Publication statusPublished - 2008

Publication series

NameResearch in Labor Economics
ISSN (Print)01479121


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