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Reallocation and the Role of Firm Composition Effects on Aggregate Wage Dynamics

Author

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  • Adamopoulou Effrosyni
  • Bobbio Emmanuele
  • Philippis Marta De
  • Giorgi Federico

    (Directorate General for Economics, Statistics and Research, Structural Economic Analysis Directorate, Bank of Italy, Via Nazionale 91, 00184Rome, Italy)

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.

Suggested Citation

  • Adamopoulou Effrosyni & Bobbio Emmanuele & Philippis Marta De & Giorgi Federico, 2019. "Reallocation and the Role of Firm Composition Effects on Aggregate Wage Dynamics," IZA Journal of Labor Economics, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 8(1), pages 5-22, June.
    • Handle: RePEc:vrs:izajle:v:8:y:2019:i:1:p:5-22:n:3
    DOI: 10.2478/izajole-2019-0003
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    Cited by:

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    2. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    3. Christodoulopoulou, Styliani & Kouvavas, Omiros, 2022. "Wages, compositional effects and the business cycle," Working Paper Series 2653, European Central Bank.

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    More about this item

    Keywords

    aggregate wage dynamics; reallocation; firm composition effects;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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