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How do firms adjust in a crisis? Evidence from a survey among Luxembourg firms

By Patrick Lünnemann and Thomas Y. Mathä

Abstract

This paper uses survey evidence to analyse the response of Luxembourg firms to the economic and financial crisis in 2008-2009. Approximately three out of four firms reported that they were negatively affected by the crisis, mostly due to a fall in demand, but also due to financing difficulties and difficulties being paid for their products and services. The measures to adjust vary with the type and the size of the shock experienced. Firms aim at cutting costs in the first place, predominantly via a reduction of non-labour cost, but also by cutting temporary staff, bonuses and overtime compensation. While base wage freezes became much more common during the recent crisis, cuts in base wages remained very rare and few firms only reduced permanent staff in an attempt to reduce costs. The most important reasons for not cutting base wages relate to labour market regulation / existing wage agreements and the concern of reducing staff morale and effort. Finally, our results suggest that the assessment of adjustment measures and obstacles to wage cuts may depend on the economic environment and the actual situation of the firm.Economic and financial crisis, reaction to shocks, wage rigidity

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