Firms' responses to shocks by price, wage and employment in Macedonia

This paper analyses the role of the intensity of output market competition, firm's technology and of the incidence of collective wage-bargaining on firm's adjustment strategies to adverse shocks using firm-level data for Macedonia. We find that international character of product market competition reduces the relevance of firms' price reactions to cost shocks, whereas firms' exposure to domestic competition seems to have an opposite effect. The presence of collective wage agreements at national level makes a price increase less likely. The results suggest that labour intensity in production process makes firms more likely to increase prices after wage shock. The second part of the paper focuses on cost-cutting strategies and the factors that explain the choice of the strategy. The data indicate that market competition and wage agreements signed outside the firm increase the likelihood of cost-cutting strategies via labour costs, particularly through employment reduction, after cost shock. On the contrary, empirical results indicate that fluctuations in permanent employment to cost and wage shock are safeguarded by presence of temporary and part time employment.