Modelling labour adjustments over the business cycle using asymmetric cointegration

Abstract

In this study we propose to model wage and workforce adjustments over the business cycle using non-linear cointegration methods. The obtained estimates allow us to characterise the adjustment patterns separately in ‘good’ and ‘bad’ times. Adding a sectoral dimension to the data enables us to address the question of interchangeability between different channels of shock accommodation, in particular the trade-off between price and quantity adjustments of labour input. The results obtained for the Polish industry show substantial asymmetry in responses to positive and negative demand developments with wages exhibiting a high degree of downward rigidity and employment showing a hysteretic adjustment pattern. There appears to be no statistically significant trade-off between price and quantity responses. Sectors showing at least wage moderation in economic downturns tend to be more responsive in terms of employment. Conversely, workforce resilience in ‘bad’ times (mainly in industries marked by a high share of public ownership) is rather matched with wage rigidity. Thus, the results show no evidence of wage concessions being traded off for job protection.