Firms' Margins of Adjustment to Wage Growth: The Case of Italian Collective Bargaining
Abstract: This study analyses firms' adjustment behavior when facing higher labor costs. The empirical research design considers several firms' outcomes and exploits, as a source of variation in labor costs, discontinuities in contractual wages' growth set by Italian collective bargaining institutions. The results indicate that on average higher labor costs induce a fall in employment and revenues, an increase in wages, and null effects on productivity, workers' average quality, the profit margin and capital intensity. However, these effects are highly heterogeneous across the firms' productivity distribution. Employment, revenues, productivity and the profit margin are negatively related to contractual wage growth among relatively less productive companies. Instead, most efficient firms do not shrink, they tend to substitute high- with low-skilled workers and they even increase profitability. We conclude that more efficient companies, which adjust through cost-saving and labor hoarding strategies, may benefit from cleansing effects, as their product market shares increase when costs of more constrained rivals are raised.