Employment and Wage Consequences of Flexible Wage Components

Abstract

I document new facts about the relationship between flexible wage components and firm performance using a unique matched employer-employee database from Hungary. Firms providing flexible wage components adjust total wage compensation more to revenue shocks than firms without flexible wages. Nevertheless, employment responses to revenue shocks are the same at firms with and without flexible wage components. These findings also hold in the case of aggregate shocks and during the Great Recession. The results suggest that flexible wage components in their current magnitude do not attenuate employment responses to a negative revenue shock. Finally, I discuss the possible explanations for the empirical findings.