Why Firms Lay Off Workers instead of Cutting Wages: Evidence from Matched Survey-Administrative Data

Antoine Bertheau, Marianna Kudlyak, Birthe Larsen, Morten Bennedsen

Research output: Contribution to conferencePaperResearch


We study how firms adjust labor in response to adverse shocks - via layoffs or pay cuts - and the reasons behind each adjustment margin. To do so, we design and implement a novel large-scale survey of firms in Denmark and link it to administrative data. We find that layoffs are much more prevalent than pay cuts, but pay cuts are not rare. Second, employers do not consider pay cuts to be a viable substitute for layoffs during crises. The size of a hypothetical pay cut needed to save a layoff is large. Furthermore, some layoffs during a crisis are not caused by the crisis. Rather, a crisis is an opportune time for firms to lay off some workers. Third, employers that do not cut base pay think that it would damage morale or lead employees to quit, or they perceive base pay as a commitment to employees. Fourth, losing specific workers’ skills is the key consideration in layoff decisions.
Original languageEnglish
Publication dateApr 2023
Number of pages69
Publication statusPublished - Apr 2023
EventLabor Studies Program Meeting, Spring 2023 - Federal Reserve Bank of Chicago, Chicago, United States
Duration: 28 Apr 202328 Apr 2023


ConferenceLabor Studies Program Meeting, Spring 2023
LocationFederal Reserve Bank of Chicago
Country/TerritoryUnited States
Internet address


  • Wage rigidity
  • Layoffs

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