Corporate profitability and labour market adjustment – findings of a micro data study

During the crisis, firms saw their profitability deteriorate sharply in the weakening demand environment, which they reacted to by curbing labour costs. Cost-side adjustment thus acted as a buffer against inflationary pressure. In earlier analyses, we investigated this behaviour of firms using macro variables; this study complements our previous effort with an analysis carried out on a firm-level database. The profit margin determined on the basis of micro data paints a similar picture as the one calculated using macro statistics, suggesting that profitability had returned to pre-recession levels by 2011. At the same time, we believe that the return indicator (ROA) derived from corporate data provides a better indication of developments in profitability, to which firms must adjust. Growth in value added plays a pivotal role in their profitability gains. Companies adapted to lower demand during the recession through labour cost adjustment, but this trend only more or less followed changes in profitability. The return indicator suggests that a pronounced improvement in the demand environment is needed in order for private sector profitability to regain its pre-recession level of 2007 from the level of 2011. At the same time, profitability trends are characterised by strong heterogeneity, and thus as external demand started to increase moderately from 2010, the profitability of export-oriented firms improved significantly. Firms producing for the domestic market may see a marked improvement in their profitability once domestic demand picks up.