Erosion of purchasing power and labor supply

Abstract

This paper presents three studies on the labor market in Italy, carried out using questionnaires over the course of time (1990–2002). The main result is that, if real wages decline to a certain extent, employed workers increase their labor supply, in order to recoup their lost purchasing power and to redress, perhaps unconsciously, the decline in their economic and social hierarchical position. As long as real wages grew at a satisfactory rate, in the early 90s, workers were unwilling to change their work schedules in either direction—exchanging income for leisure time at the current hourly wage or vice versa—whatever were their work time and wages. During the last decade workers—who suffered a decrease in real wages—have been willing to work more hours. As a result, workers did not demand more leisure time despite the fact that it had become cheaper as predicted by traditional theory. Thus, employers may expect a not-insignificant increase in labor supply if real wages decrease.