Allocative Efficiency and Aggregate Wage Dynamics in Italy

Abstract

Aggregate wages display little cyclicality compared with what a standard model would predict. Wage rigidities are an obvious candidate, but a recent strand of the literature has emphasized the need to take into account the growing importance of worker composition effects during downturns. With reference to the Italian case we document that firm composition effects also matter increasingly in explaining aggregate wage dynamics, i.e. aggregate wage growth has been raised by the increase in the employment weight of highwage firms. To the extent that this reallocation occurs towards more productive firms, the composition effects may also reflect an efficiency enhancing mechanism. We use a newly available dataset based on social security records covering the universe of Italian employers from 1990 to 2013 and employ a standard measure of allocative efficiency on wages paid across firms. We show that this measure has improved progressively since before the recent downturn, being aligned at the sectoral level with measures of productivity growth and market openness to competition. We then focus on the recent downturn and find that large firms were able to adjust wages more than small firms and that small firms instead adjusted employment to a larger extent. Finally, we document that the continued improvement in the measure of allocative efficiency over this period correlates positively with measures of economic activity (evolution of employment and value added) across sectors.

Wage rigidities and business cycle fluctuations: a linked employer-employee analysis

“…Table 3 shows the determinants of our measure of wage rigidity. Column 1 shows that larger firms, whose average wages are less often flattened upon the national contractual wages, tend to be less rigid, which is in line with the results of Adamopoulou et al (2016) and with those in Section 4. Again in line with the results of our previous section, column 2 shows that firms are less rigid if they are characterized by a high share of blue collars.…”

“…Tables 1 and 2 report the descriptive statistics for the sample of firms and workers respectively. Our sample of workers covers about 7% of the total workforce in the non-agricultural business sector while the firm data refer to the universe of firms with at least one employee (see Adamopoulou et al 2016). …”

“…The relatively flat evolution of aggregate wages is usually explained through (i) the presence of wage rigidities, that is a well-known feature of many labour markets (see for example, Kahn 1997; Knoppik and Beissinger 2009;Devicienti et al 2007;Dickens et al 2007;and Holden and Wulfsberg 2008), and through (ii) cyclical changes in the composition of the workforce (Lemieux 2006), since lower-paid workers are usually more severely affected during recessions. Some recent literature (D' Amuri 2014; Adamopoulou et al 2016;Daly et al 2011;Verdugo 2016) indeed finds that composition effects have driven up aggregate wages, particularly during the recent recession. This paper focuses on wage rigidities and studies the distribution of wage changes for job stayers over the last 25 years, with a particular focus on the Great Recession.…”

Wage Rigidities and Business Cycle Fluctuations: A Linked Employer-Employee Analysis

“…For what concerns bonuses the Structure of Earnings Survey shows they accounted for almost 10 per cent of annual earnings in 2006. This suggests that bonuses and the part of the wage related to decentralized bargaining may be an important factor behind the observed changes of wages, which is in line with the finding that more wage adjustments are performed by larger firms (see also Adamopoulou et al, 2016). In the next Section we shed more light on the residual part of wages by focusing on a case study.…”

“…The relatively flat evolution of aggregate wages is usually explained through (i) the presence of wage rigidities, that is a well-known feature of many labour markets (see for example Kahn, 1997;Devicienti et al, 2007;Dickens et al, 2007), and through (ii) cyclical changes in the composition of the workforce (Lemieux, 2006), since lower-paid workers are usually more severely affected during recessions. Some recent literature (D'Amuri, 2014;Adamopoulou et al, 2016;Daly et al, 2016;Verdugo, 2016) indeed finds that composition effects have driven up aggregate wages, particularly during the recent recession.…”