Working Paper: Labour Market Adjustment during 2008–2013 in Latvia: Firm Level Evidence

In this paper we examine firm level survey data collected in the framework of the Eurosystem's Wage Dynamics Network (WDN) in Latvia. The survey explores labour cost adjustment strategies during 2008–2009 and 2010–2013 with the aim to uncover wage, employment, and price adjustment channels for different firm categories during crisis and post-crisis periods. The results show that more than half of firms were affected by a slump in demand and credit conditions during 2008–2009, with the effect being particularly strong on non-exporting firms. Unlike what the macroeconomic picture of average wage suggests, both flexible and permanent wages were adjusted strongly in response to the shock. One third of firms reduced employment or altered its structure strongly, with freeze of new hires and reduction of permanent employees used particularly often. The demand improved during 2010–2013 despite still tight credit conditions. Decrease in working hours, freeze of wages and new employment remained significant measures of labour cost adjustment during the latter period. Improvements in demand conditions transmitted into the increase in base wage, while bonuses were raised relatively less often.

Keywords: firm survey data, wage adjustment, labour force adjustment, price setting

JEL codes: J31, J38, J24, D22, C25