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Allocative efficiency and aggregate wage dynamics in Italy

Author

Listed:
  • Effrosyni Adamopoulou

    (Bank of Italy)

  • Emmanuele Bobbio

    (Bank of Italy)

  • Marta De Philippis

    (Bank of Italy)

  • Federico Giorgi

    (Bank of 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 high-wage 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.

Suggested Citation

  • Effrosyni Adamopoulou & Emmanuele Bobbio & Marta De Philippis & Federico Giorgi, 2016. "Allocative efficiency and aggregate wage dynamics in Italy," Questioni di Economia e Finanza (Occasional Papers) 340, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_340_16
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    References listed on IDEAS

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    Cited by:

    1. Effrosyni Adamopoulou & Emmanuele Bobbio & Marta De Philippis & Federico Giorgi, 2016. "Wage rigidities and business cycle fluctuations: a linked employer-employee analysis," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-32, December.
    2. Emmanuele Bobbio, 2016. "Tax evasion, firm dynamics and growth," Questioni di Economia e Finanza (Occasional Papers) 357, Bank of Italy, Economic Research and International Relations Area.
    3. Guido Bulligan & Eliana Viviano, 2017. "Has the wage Phillips curve changed in the euro area?," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-22, December.
    4. Emmanuele Bobbio, 2017. "Tax Evasion, Firm Dynamics and Growth," 2017 Meeting Papers 683, Society for Economic Dynamics.
    5. Christodoulopoulou, Styliani & Kouvavas, Omiros, 2022. "Wages, compositional effects and the business cycle," Working Paper Series 2653, European Central Bank.
    6. Matteo Bugamelli & Francesca Lotti & Monica Amici & Emanuela Ciapanna & Fabrizio Colonna & Francesco D�Amuri & Silvia Giacomelli & Andrea Linarello & Francesco Manaresi & Giuliana Palumbo & Filippo , 2018. "Productivity growth in Italy: a tale of a slow-motion change," Questioni di Economia e Finanza (Occasional Papers) 422, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Wage dynamics; allocative efficiency;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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