Paper Spotlight: Wages and Firm Performance: Evidence from the 2008 Financial Crisis

Paige Parker Ouimet

Elena Simintzi

We are living through a pandemic-induced recession that has slashed many firms’ cash flows with a consequent negative impact on both employment and wage levels. Firms, fighting for survival, will be pressed to cut costs, and wages are an important budget line for the vast majority of firms. At the same time, workers are important assets for firms’ survival and prosperity. What are the effects of paying higher wages on firm performance during economic uncertain times? Higher wages can impact negatively firm profitability but can also incentivize workers and maximize employee productivity. Paige Parker Ouimet and Elena Simintzi address this question in the paper Wages and Firm Performance: Evidence from the 2008 Financial Crisis.” Paige and Elena use data from a sample of unionized firms operating in the United Kingdom during the Great Recession of 2008 and exploit differences in the timing of long-term wage agreements entered into by the sample firms. Firms that entered in such agreements just before the onset of the crisis paid higher wages, but did not reduce employment during the crisis. Surprisingly, despite facing higher payroll expenditures during such uncertain times, these firms experienced higher net labor productivity and profits per employee following the crisis. These results suggest that motivating employees in a crisis is a valuable asset that improves firms’ prospects. This paper is coming soon to advance access.

Spotlight by Andrew Ellul
Photos courtesy of Paige Parker Ouimet and Elena Simintzi

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