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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Jul 7, 2020

Wages and Firm Performance: Evidence from the 2008 Financial Crisis


We examine the effect of paying higher wages on firm performance during the 2008 financial crisis. To identify variation in wages, we rely on heterogeneity in the timing of long-term wage agreements for a sample of UK firms. We instrument for firms signing long-term agreements overlapping with the crisis by the presence of a contract signed in 2006 or earlier and expiring before September 2008. Treated firms paid higher wages but also realized greater labor productivity relative to control firms. These findings are consistent with the intuition that opportunity cost differentials between treated and control firms induce employees to exert higher effort.

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