The missing micro links. Labour productivity and wages across the distribution of employees: evidence from Italy

To what extent does labour productivity translate into wage growth across the wage distribution of employees? Do workers in the bottom 10% benefit as much as those in the top 10%? We investigate these questions using a large administrative database of about six million private-sector employees observed in 2014 and 2019. The data integrate detailed information on employees' positions and characteristics -such as education, occupation, age, and gender- as well as employers' characteristics, including firm size, location, sector, and labour productivity. Focusing on full-time permanent workers, we use an Oaxaca-RIF decomposition to assess how changes in hourly productivity relate to hourly wage outcomes across the distribution. Our results show that firms' productivity growth is not sufficient to ensure wage increases, particularly at the bottom of the distribution where hourly wages are detached from labour productivity. In order to reduce wage inequality, stronger protections for workers at the bottom of the wage distribution could be required.