Abstract
Using longitudinal social security data, this study finds evidence of weak real wage cyclicality in Spain throughout 1988–2011. The baseline estimate of a 0.4 % increase in wages in response to a one percentage point decline in the unemployment rate lies in the lower bound of available estimates for developed countries. Wage cyclicality in a rigid labour market like Spain is mainly driven by workers under temporary contracts and newly-hired workers. I calculate the cyclicality of the net present value of wages in new matches—the relevant piece of information for firms posting vacancies, but a rarely available measure—and find that it is well approximated by the cyclicality of wages for newly-hired workers.
Highlights
Recent evidence on real wage cyclicality using worker-level data shows wages are much more cyclical than previously thought
Most of this evidence is available for countries with flexible labour markets, mainly the United States
The first principle automatically extends any collective agreement beyond the scope of a firm to all workers in the same sector and province, even if they had not participated in the bargaining process
Summary
Recent evidence on real wage cyclicality using worker-level data shows wages are much more cyclical than previously thought. Following the lead of Bils (1985), many studies have found that since the early 1970s individual wages respond to changes in the unemployment rate [see Pissarides (2009) for a summary of the evidence]. Most of this evidence is available for countries with flexible labour markets, mainly the United States. The Spanish system of collective bargaining is based on two principles that deter firms from adjusting wages along the business cycle. Duality in the labour market insulates workers under permanent contracts (around 67– 70 % of the workforce with high levels of employment protection) from business cycle fluctuations
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