Pension shocks and wages
How do wages respond to firm-level idiosyncratic cost shocks? We create a unique dataset that links longitudinal data on workers’ compensation to the unexpected costs that UK firms have been forced to pay to plug large deficits in their legacy defined benefit pension plans. We show that firms are able to share the burden of such costs when a significant share of their workers are current or former members of the plan. We also investigate how compensation responds to the closure of defined benefit plans to future benefit accrual. We find that firms are able to use such closures to effectively reduce total compensation of workers who are plan members. These results point to significant frictions in the labour market, which we show are a direct result of the pension arrangement that workers have. Closing schemes has an implicit cost for firms since it reduces the frictions that workers face.
27 March 2018 Paper Number CEPDP1536
This CEP discussion paper is published under the centre's Labour markets programme.