Abstract
Abstract Aggregate wages display little cyclicality compared to what a standard model would predict. Wage rigidities are an obvious candidate, but the existing literature has emphasized the need to take into account the growing importance of worker composition effects, especially during downturns. This paper seeks to understand the role of firm heterogeneity for aggregate wage dynamics with reference to the Italian case. Using a newly available dataset based on social security records covering the universe of Italian employers between 1990 and 2015, we document that firm composition effects increasingly matter in explaining aggregate wage growth and largely reflect shifts of labor from low-paying to high-paying firms, especially in the most recent years. We find that changes in reallocation of workers across firms accounted for approximately one-fourth of aggregate wage growth during the crisis.
Highlights
During downturns, aggregate wages appear to respond very little to business cycle fluctuations
By applying the simple BO exercise in Italy, we find that composition effects matter substantially for aggregate wage dynamics and increasingly so after the recent crisis
Composition effects have played an important role in determining the dynamics of aggregate wages during the last decade
Summary
Aggregate wages appear to respond very little to business cycle fluctuations. While our results for workers are in line with the previous literature (Hines, Hoynes and Krueger, 2001, for instance), which shows that job losses during downturns disproportionally affect workers with lower than average wages, to our knowledge, we are the first to quantify the increasing contribution of employers’ characteristics in explaining aggregate wage dynamics Given this first set of results, we believe that the firm component is worth a more thorough investigation. We distinguish which mechanism lies behind the results we obtain from the BO decomposition by applying on firm-level wage data a standard tool taken from the reallocation literature, the so-called OP decomposition This method allows us to distinguish the part of aggregate wage changes that is due to: (i) changes in the type of firms entering/exiting the market; (ii) uniform changes in the average wage of all firms; and (iii) changes in the relative size of firms, i.e. on how workers are allocated across higher/lower paying firms
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