LABOUR MARKET FLEXIBILITY AND EMPLOYMENT ADJUSTMENT: MICRO EVIDENCE FROM UK ESTABLISHMENTS

Abstract

In this paper we study how firms react to demand shocks, examining how different aspects of flexibility shape their responses. Our main findings are: (i) very few firms choose to adjust price in response to a demand shock; (ii) firms with more flexibility are more likely to respond to demand shocks by adjusting employment and hours. Our results provide a microeconomic explanation for recent macroeconomic evidence that labour input has become more closely aligned to the business cycle.