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<p>We examine how German and Italian manufacturing firms with more than 20 employees adjust labor costs in response to demand shocks. Using matched employer-employee-balance sheet data and an exogenous sector-level demand shifter based on the collapse in world trade during the Great Recession, we find that a 1% exogenous decrease in sales leads the average German firm to reduce wages by 0.20%—twice the response observed in Italian firms. In contrast, employment adjustment is more pronounced in Italy, driven by a decline in hiring rate. These differences are not driven by variations in hours worked per employee, labor supply conditions, or firm exposure to the concurrent credit shock. Finally, we find that producer prices in both countries follow similar dynamics in response to the shock.</p>

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How Firms Adjust to Demand Shocks: Evidence from Germany and Italy in the Great Recession

  • 期刊论文

  • 发表日期：

    2025年10月30日

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  • Francesco D’Amuri,
  • Salvatore Lattanzio,
  • Benjamin Smith

摘要

We examine how German and Italian manufacturing firms with more than 20 employees adjust labor costs in response to demand shocks. Using matched employer-employee-balance sheet data and an exogenous sector-level demand shifter based on the collapse in world trade during the Great Recession, we find that a 1% exogenous decrease in sales leads the average German firm to reduce wages by 0.20%—twice the response observed in Italian firms. In contrast, employment adjustment is more pronounced in Italy, driven by a decline in hiring rate. These differences are not driven by variations in hours worked per employee, labor supply conditions, or firm exposure to the concurrent credit shock. Finally, we find that producer prices in both countries follow similar dynamics in response to the shock.