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Nominal and Real Wage Rigidity: An Assessment Using Italian Microdata

  • Francesco Devicienti
  • Agata Maida
  • Paolo Sestito

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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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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  1. David Card, 1995. "The Wage Curve: A Review," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 285-299, June.
  2. 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.
  3. 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.
  4. Fehr, Ernst, 2000. "The Robustness and Real Consequences of Nominal Wage Rigidity," CEPR Discussion Papers 2516, C.E.P.R. Discussion Papers.
  5. Lucifora Claudio & Origo Federica, 1999. "Alla ricerca della flessibilità: un'analisi della curva dei salari in Italia," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 3-36.
  6. 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.).
  7. David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122 National Bureau of Economic Research, Inc.
  8. 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.
  9. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
  10. 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(1), pages 1-76.
  11. 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.
  12. 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.
  13. repec:rie:review:y:1999:v:1:i:1 is not listed on IDEAS
  14. David Amirault & Brian O'Reilly, 2001. "Downward Nominal-Wage Rigidity: Micro Evidence from Tobit Models," Working Papers 01-7, Bank of Canada.
  15. repec:rie:review:v:4:y:1999:i:1:n:1 is not listed on IDEAS
  16. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December.
  17. 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.
  18. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages C176-95, March.
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