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Nominal and Real Wage Rigidity: An Assessment Using Italian Microdata

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Author Info
Francesco Devicienti
Agata Maida
Paolo Sestito

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Abstract

This paper uses administrative longitudinal micro-data from the Social Security Institute (INPS) to estimate the extent of nominal and real wage rigidity in Italy. Using a switching regime model of individual wage changes, which accounts for both the determinants of notional wage changes and measurement errors in individual wages, the paper sheds light on the relative importance of the two sources of rigidity. Overall, estimates show that wages in Italy are inflexible, but this is mainly due to real wage rigidity rather than downward nominal wage rigidity. Between 50 and 80% of all notional wage changes that lie below a sort of inflation-related or union-set threshold are forced to align to this level. On the other hand, only about 10% of the negative notional wage changes are transformed into wage freezes by the operation of the downward nominal wage rigidity constraint, which existing literature has mainly focused on. The implications of the estimated wage rigidity for the real side of the economy are also explored.

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Publisher Info
Paper provided by LABORatorio R. Revelli, Centre for Employment Studies in its series LABORatorio R. Revelli Working Papers Series with number 33.

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Length: 41 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:cca:wplabo:33

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Related research
Keywords: Nominal wage rigidity; real rigidity; natural unemployment rate; switching regression; measurement error.;

Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June. [Downloadable!] (restricted)
    Other versions:
  2. David Amirault & Brian O'Reilly, 2001. "Downward Nominal-Wage Rigidity: Micro Evidence from Tobit Models," Working Papers 01-7, Bank of Canada. [Downloadable!]
  3. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier. [Downloadable!] (restricted)
    Other versions:
  4. Giuseppe Bertola & Francine D. Blau & Lawrence M. Kahn, 2001. "Comparative Analysis of Labor Market Outcomes: Lessons for the US from International Long-Run Evidence," NBER Working Papers 8526, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Fehr, Ernst & Goette, Lorenz, 2005. "Robustness and real consequences of nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 779-804, May. [Downloadable!] (restricted)
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  6. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages C176-95, March. [Downloadable!] (restricted)
  7. Claudio LUCIFORA & Federica ORIGO, 1999. "Alla ricerca della flessibilita': un'analisi della curva dei salari in Italia," Rivista Italiana degli Economisti, SIE - Societa' Italiana degli Economisti (I), vol. 1(1), pages 3-36, April. [Downloadable!] (restricted)
  8. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December. [Downloadable!] (restricted)
  9. Fehr, Ernst, 2000. "The Robustness and Real Consequences of Nominal Wage Rigidity," CEPR Discussion Papers 2516, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  11. David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Orietta Dessy, 2002. "Nominal wage rigidity in the European Countries: evidence from the Europanel," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D2-1, International Conferences on Panel Data. [Downloadable!]
  13. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-1), pages 1-76. [Downloadable!]
  14. David E. Lebow & David J. Stockton & William L. Wascher, 1995. "Inflation, nominal wage rigidity, and the efficiency of labor markets," Finance and Economics Discussion Series 95-45, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Knoppik, Christoph & Beissinger, Thomas, 2005. "Downward Nominal Wage Rigidity in Europe: An Analysis of European Micro Data from the ECHP 1994-2001," IZA Discussion Papers 1492, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Steinar Holden, 2004. "Wage formation under low inflation," Working Paper 2004/14, Norges Bank. [Downloadable!]
    Other versions:
  3. Bläs, Barno, 2006. "Ausmaß und reale Konsequenzen nach unten starrer Nominallöhne. Eine Untersuchung für den deutschen Arbeitsmarkt," Regensburger Diskussionsbeiträge zur Wirtschaftswissenschaft 416, University of Regensburg, Department of Economics. [Downloadable!]
  4. Cornelißen, Thomas & Hübler, Olaf, 2005. "Downward Wage Rigidity and Labour Mobility," IZA Discussion Papers 1523, Institute for the Study of Labor (IZA). [Downloadable!]
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This page was last updated on 2009-12-3.

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