Incontro The Consequences of Labor Demand Shocks for Workers across Countries

Abstract

How do labor demand shocks transmit to workers’ earnings? Using harmonized matched employer–employee data from six European countries (Denmark, France, Hungary, Italy, Portugal, and Sweden) and sharp changes in firm sales, we implement an event-study design that does not condition on workers leaving the firm and find that earnings responses are persistent and highly heterogeneous across countries. The implied pass-through elasticity from firm sales to worker earnings is two to four times larger in Southern than in Northern Europe. Elasticities to positive and negative shocks are symmetric in magnitude, although workers in Southern Europe benefit less from positive shocks. To understand the sources of cross-country differences in pass-through, we analyze worker mobility. Restricting attention to job stayers substantially attenuates estimated effects, highlighting the importance of separations. Moreover, the absence of systematic cross-country differences in separations following negative shocks suggests that the smaller earnings losses observed in Nordic countries reflect faster reabsorption of displaced workers.