HOME » Publications » Economic Review


Vol. 59, No. 4, pp. 289-304 (2008)

“Wage-Employment Adjustment and Price Setting Behavior”
Ryo Kambayashi (Institute of Economic Research, Hitotsubashi University), kenn Ariga (Institute of Economic Research, Kyoto University)

Using a survey of Japanese firms, this paper empirically examines interactions among employment, wage and price adjustments at the firm level. Our major findings are as follows. (1) The firms in the survey generally view moral hazards as the most important factor preventing downward wage adjustments, a perception shared by German firms in a similar survey. Based upon questions on episodes of large negative shocks on labor demand, our findings are: (2) they tended to reduce their employment, not wages, if they viewed that they would lose more productive workers when they lower wages; and (3) those firms facing more competitive product markets tended to use employment, rather than wage, adjustments.