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The anatomy of labor cost adjustment to demand shocks: Germany and Italy during the Great Recession

Author

Listed:
  • Francesco D'Amuri

    (Bank of Italy)

  • Salvatore Lattanzio

    (Bank of Italy)

  • Benjamin S. Smith

    (Federal Trade Commission)

Abstract
We shed light on the anatomy of labor cost adjustment in German and Italian manufacturing firms with more than 20 employees, leveraging matched employer employee-balance sheet data and an exogenous demand shifter that exploits the collapse in world trade during the Great Recession. Following a 1 per cent exogenous decrease in sales, the average German firm cuts wage growth by 0.19 per cent, twice as much as its Italian counterpart. The employment adjustment is gradual in both countries but more pronounced in Germany, where, however, firms in sectors hardest hit by the world trade collapse had been increasing employment in the run-up to the Great Recession. These results are not driven by differences in the response of hours per worker, in labor supply conditions, or in firms' exposure to the concurrent negative credit shock. Finally, we find that - in both countries - producer prices were reduced to a similar extent in response to the shock.

Suggested Citation

  • Francesco D'Amuri & Salvatore Lattanzio & Benjamin S. Smith, 2023. "The anatomy of labor cost adjustment to demand shocks: Germany and Italy during the Great Recession," Temi di discussione (Economic working papers) 1411, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1411_23
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    References listed on IDEAS

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    More about this item

    Keywords

    labor demand; wages; employment; flexibility;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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