How do Regulated and Unregulated Labor Markets Respond to Shocks? Evidence from Immigrants During the Great Recession

Michele Tuccio,Sergei Guriev,Biagio Speciale

doi:10.1093/jleo/ewy017

Abstract

We study wage adjustment during the recent crisis in Italy using a unique dataset on immigrant workers that includes those employed in formal and informal sector. We find that before the crisis immigrants’ wages in the formal and informal sectors moved in parallel (with a 15% premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32%. The difference was particularly salient for workers in occupations where the minimum wage is likely to be binding, and in “simple” occupations where there is high substitutability between immigrant and native workers. Calibrating a simple partial equilibrium model of spillovers between formal and informal markets, we find that less than 10% of workers who lost a formal job during the crisis move to the informal sector. We also find that if the formal sector wages were fully flexible, the decline in formal employment would be in the range of 1.5–4.5%—much lower than 16% decline that we observe in the data.

Highlights

The Great Recession has brought a substantial increase in unemployment in Europe, with an average unemployment rate that has grown from 8% in 2008 to 12% in 2014
In this article, we study the process of wage adjustment in formal and informal labor markets for immigrants in Italy
We show that the wage adjustment in the informal sector takes place along with a shift from formal to informal employment

Summary

Introduction

The Great Recession has brought a substantial increase in unemployment in Europe, with an average unemployment rate that has grown from 8% in 2008 to 12% in 2014. Downward adjustment of wages in response to macroeconomic shocks is especially important in the euro area where labor markets cannot accommodate shocks through exchange rate depreciation or through internal labor mobility (migration among EU countries is much more limited than, for example, labor mobility across US states). As Boeri (2014) documents, the percentage of firms relying on the two-tier bargaining – both plant-level and industry-level – decreased over time, down to less than 10% in 2006: employers in Italy typically prefer following the wages set by industry agreements, rather than through further negotiations at the plant level. Devicienti et al (2016) discuss available evidence suggesting that this decline over time in the incidence of firm-level agreements in Italy was partly a consequence of a reduction in unionization rates As Boeri (2014) documents, the percentage of firms relying on the two-tier bargaining – both plant-level and industry-level – decreased over time, down to less than 10% in 2006: employers in Italy typically prefer following the wages set by industry agreements, rather than through further negotiations at the plant level. Devicienti et al (2016) discuss available evidence suggesting that this decline over time in the incidence of firm-level agreements in Italy was partly a consequence of a reduction in unionization rates

Methods

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Discussion

Conclusion