Real wage responsiveness to unemployment in Spain: asymmetries along the business cycle

Abstract

We estimate real wage cyclicality in the period compressed between 1987 and 2013 using a large administrative dataset of workers in Spain. Real wages are weakly procyclical in Spain and focusing on differences in different phases of the business cycle, we find that differences across expansions and recessions are significant, with an even lower real wage cyclicality in recessions. Furthermore, higher levels of unemployment do not translate into additional real wages adjustments when the economy is contracting, while lower levels of unemployment during expansions have incremental effects on wage elasticity. This general result holds after accounting for differences in tenure, type of contract and age categories. Nevertheless, wages of newly-hired workers are the most sensitive to the business cycle and exhibit the lowest asymmetric pattern between expansions and recessions. At the other end, wages of workers with more than six years of tenure can be characterized as the most protected against economic downturns. The same is true for fixed-term vs. permanent workers, as well as for young vs. older workers.JEL classification: e32, j31

On the Efficiency of Labor Market Reforms: How to Solve the Spanish Puzzle?

“…According to our observations presented in the eighth column of Table 1, downward nominal wage rigidity indeed occurs in the Spanish case. This is also confirmed by Font et al (2015) who provide evidence on significant downward (real) wage rigidities in Spain explained by much lower wage cyclicality in recessions than in expansions. Schmitt-Grohé and Uribe (2013) also report a monotonic increase in the nominal hourly wages for Cyprus, Greece, Ireland and Spain up to 2011.…”

Are the Spanish long-term unemployed unemployable?

“…24 These results are not included to save space, but they are available upon request. 25 According to the estimates with MCVL data for 1987-2013 by Font et al (2015), a 1 pp increase in unemployment leads to a fall in real wages of −0.24 pp in the recession, and between −0.38 and −0.48 in the expansion. Real wage elasticity is found to be about 70% higher for job movers (see also De la Roca 2014).…”

Has the wage Phillips curve changed in the euro area?

“…The authors, however, do not provide estimates of the PC. Font et al (2015) show that in Spain, real wages of newly hired workers and temporary workers are more sensitive to the business cycle, suggesting indirectly that changes in workers' composition can affect the dynamics of aggregate wages and its reaction to unemployment. With respect to these papers, our contribution is not only to use very flexible tests and techniques for the case of a timevarying PC but also to show that composition effects may certainly help to explain part the steepening of the PC.…”