Scandinavian Working Papers in Economics
Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics
No 4/2025: Why Firms Lay Off Workers Instead of Cutting Wages: Evidence From Linked Survey-Administrative Data
Antoine Bertheau (), Marianna Kudlyak (), Birthe Larsen () and Morten Bennedsen ()
Additional contact information
Antoine Bertheau: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH, Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Marianna Kudlyak: Research Department, Federal Reserve Bank of San Francisco, Postal: Federal Reserve Bank of San Francisco, Research Department, 101 Market St, San Francisco, CA 94105, USA
Birthe Larsen: Dept. of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelænshaven 16A, 2000 Copenhagen F, Denmark
Morten Bennedsen: Dept. of Economics, University of Copenhagen, Postal: Copenhagen Business School, Department of Economics, Øster Farimagsgade 5, Bygning 26, 1353 København K, Denmark
Abstract: We use a novel large-scale survey of firms, implemented in Denmark in 2021 and linked to administrative data, to study why firms lay off workers instead of cutting wages. Our questions on layoffs, wage cuts, and the link between them provide new insights into firms' strategies for adjusting labor in response to adverse shocks. We find that layoffs are more prevalent than wage cuts, but wage cuts are not rare in firms experiencing revenue reduction and were used by 15% of such firms. Employers are hesitant to cut wages in many instances because they see wage cuts as a poor substitute for layoffs. First, firms report that lowering wages triggers costs through the impact on morale and quits. Comparing these costs with potential savings from wage cuts, most employers in the survey agree that a wage reduction would not have saved jobs. Second, firms report that a crisis is an opportune time for layoffs because of lower opportunity costs of restructuring and because layoffs during a crisis are perceived by workers as more fair. We find that firms that report such opportunistic layoffs are less likely to implement wage cuts.
Keywords: Wage rigidity; Layoffs
Language: English
89 pages, February 7, 2025
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