Abstract
This paper analyses wage dynamics in Italy in the last 25 years with special focus on the recent recession. Using linked employer-employee data we document the presence of a trade-off between wage and employment adjustments: firms experiencing more wage rigidities exhibit more employment adjustments. Over time, the average amount of nominal wage rigidities was subdued during the recession years. Most of the adjustments took place through the part of wages that is not negotiated at the national level. In a rather rigid institutional context, a larger share of temporary workers, whose contractual relationship may be terminated without cost and whose wages are more frequently renegotiated, served instead as a significant flexibility enhancing margin. More broadly, we find that larger firms, with a greater share of blue-collar workers or belonging to a sector in which firm bonuses represent a large part of annual earnings, were the ones displaying a higher level of wage flexibility.
Highlights
Understanding what drives wage dynamics is important in order to explain why aggregate wages tend to be much less volatile over time than what standard macroeconomic models predict (Figure 1)
We seek to answer whether firms which were structurally less able to adjust wages of job stayers reacted by adjusting employment more and whether these firms, by hiring new workers at a re-negotiated salary which corresponds more to the new cyclical conditions, managed to partially compress their average wage per employee, even in the presence of high levels of wage rigidity for stayers
In this paper we document the evolution of wage rigidities over time in Italy and we find that during the recent recession wage flexibility has increased
Summary
Understanding what drives wage dynamics is important in order to explain why aggregate wages tend to be much less volatile over time than what standard macroeconomic models predict (Figure 1). We show that more rigid firms reacted to the shock by adjusting employment more, but only if they were endowed with a flexible enough workforce, i.e. with a large share of temporary workers before the crisis In this way they managed, even if rigid, to indirectly adjust their average cost per employee.. The available literature is much scarcer in this case and the evidence is mixed: Card and Hyslop (1997) find that wage rigidities have small effects on the economy, Devicienti et al (2007) and Ehrlich and Montes (2015) find instead that wage rigidities are associated to lower employment levels We contribute to this debate by exploiting the richness of our data in terms of controls and time span and we estimate the relationship between wage rigidity, accessions and separations, as well as with the average wage per employee at the firm level.
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