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Nominal and Real Wage Rigidity: An Assessment Using Italian Microdata

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  • Francesco Devicienti
  • Agata Maida
  • Paolo Sestito

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.

Suggested Citation

  • Francesco Devicienti & Agata Maida & Paolo Sestito, 2003. "Nominal and Real Wage Rigidity: An Assessment Using Italian Microdata," LABORatorio R. Revelli Working Papers Series 33, LABORatorio R. Revelli, Centre for Employment Studies.
  • Handle: RePEc:cca:wplabo:33
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    References listed on IDEAS

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    6. Bruno Contini & Michelangelo Filippi & Claudio Malpede, 2000. "Safari nella giungla dei salari. Nel Mezzogiorno si lavora di meno?," LABORatorio R. Revelli Working Papers Series 3, LABORatorio R. Revelli, Centre for Employment Studies.
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    Citations

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    Cited by:

    1. Cornelissen, Thomas & Hübler, Olaf, 2005. "Downward Wage Rigidity and Labour Mobility," IZA Discussion Papers 1523, Institute for the Study of Labor (IZA).
    2. Holden, Steinar, 2004. "Wage formation under low inflation," Memorandum 09/2004, Oslo University, Department of Economics.
    3. Francesco Devicienti & Agata Maida & Paolo Sestito, 2007. "Downward Wage Rigidity in Italy: Micro-Based Measures and Implications," Economic Journal, Royal Economic Society, vol. 117(524), pages 530-552, November.
    4. Christoph Knoppik & Thomas Beissinger, 2009. "Downward nominal wage rigidity in Europe: an analysis of European micro data from the ECHP 1994–2001," Empirical Economics, Springer, vol. 36(2), pages 321-338, May.
    5. Bruno Contini & Roberto Leombruni & Lia Pacelli & Claudia Villosio, 2007. "Wage Mobility and Dynamics in Italy in the 90's," NBER Working Papers 13029, National Bureau of Economic Research, Inc.
    6. Bläs, Barno, 2006. "Ausmaß und reale Konsequenzen nach unter starrer Nominallöhne. Eine Untersuchung für den deutschen Arbeitsmarkt," University of Regensburg Working Papers in Business, Economics and Management Information Systems 416, University of Regensburg, Department of Economics.

    More about this item

    Keywords

    Nominal wage rigidity; real rigidity; natural unemployment rate; switching regression; measurement error.;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • 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

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