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

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.