We investigate how wage-setting constraints, such as national minimum wages or collectively bargained sectoral wage floors, affect firm responses to demand shocks. We develop a framework to interpret heterogeneous firm responses to demand shocks as a function of the wage-setting constraints firms face, and provide empirical evidence on the relevance of these constraints in shaping firm behavior for three countries: Portugal, Norway, and Colombia. We discuss implications of our findings for conventional estimates of market power in the labor market.