Optimal combination of wage cuts and layoffs—the unexpected side effect of a performance-based payment system

Table 3 Layoff regression (probit and IV-probit)

Dependent variable: layoff = 1	(1)	(2)	(3)	(4)
Method	Probit	Probit	IV-probit	IV-probit
Wage cut = 1	0.466	0.547	−0.364	−0.172
	(0.095)	(0.104)	(0.059)	(0.038)
ln(capital size (million yen))/100	−0.343	−0.381	−0.551	−0.796
	(0.111)	(0.113)	(0.479)	(0.376)
Firm age/1000	−0.255	−0.303	−0.275	−0.443
	(0.181)	(0.179)	(0.499)	(0.486)
Limitation for voluntary retirement	–	−0.198	–	−0.363
		(0.038)		(0.337)
Reason for downsizing dummies
To cope with critical management adversity expected in the future	–	0.021	–	0.052
		(0.010)		(0.027)
To cope with a present, temporary profit reduction	–	0.038	–	0.064
		(0.013)		(0.042)
To improve earnings by focusing on the company’s specialty	–	0.002	–	0.021
		(0.020)		(0.055)
No response	–	0.036	–	0.187
		(0.027)		(0.199)
Foundation year dummies	Yes	Yes	Yes	Yes
Pseudo-R²/ log likelihood	0.272	0.303	1108.786	1119.368
N	1491	1491	1491	1491
Tests of overidentifying restrictions (H ₀: all IVs exogenous)
χ ²	–	–	0.292	0.131
P-value	–	–	0.589	0.718

Note: Standard errors clustered at an industry level are reported in parentheses. Marginal effects evaluated at the mean of the covariates are reported. One question concerns the application criteria and the limitations regarding eligibility for voluntary retirement and the early retirement incentive plan. “Limitation for Voluntary Retirement” takes the value of 1 if the firm circled at least one of the following categories: age, tenure, position, job type, and department. The degree of introduction of a performance-based payment system is used as an IV for wage cut. The reference group for the reason for downsizing dummies is “To Cope with Present Critical Management Adversity.” For firms that had not yet laid off workers, the question about the reason for downsizing asks about the main possible reason for the potential downsizing