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Downward Wage Rigidity in Italy : Micro-based Measures and Implications

We estimate the degree of downward wage rigidity in ItaIy using a micro-econometric model in which wages may be subject to both nominal and real downward rigidities. We lise the recently released Worker History Italian Panel (WHIP), an administrative individual-level data set covering both the high-inflation and automatic-indexation regime prevailing before the 1990s, and the regime that emerged after the indexation system was dismantled. Overall, we fmd a sizable amount of downward rigidities, downward real wage rigidity being much more relevant than downward nominal wage rigidity. aver time, downward rigidities bave become less important, with the reduction in real rigidities more than offsetting the rise in nominaI rigidities. This pattern is consistent with the labour market reforms Italy experienced and specifically with the abolition of the automatic price-indexation clause. In arder to verify the robustness of these results we aIso explore an identification strategy in which the reaI rigidity threshold, instead of being centred around price inflation far aII workers, is centred around the wage rise specificaIly dictated far each worker by the relevant industry-wide national collective contract. Our main results afe broadly confmned. Equipped with these more precisely identified measures of downward rigidities, we further explore their relationship with severaI labour market outcomes. We fmd that downward wage rigidities afe positively related to fmn turnover - which we interpret in terms of employment adjustments substituting far wage adjustments - and local unemployment rates - which hints at the macroeconomic relevance of our micro-based rigidity measures.

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Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 200503.

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Length: 33 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:uto:dipeco:200503
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  1. Louis N. Christofides & Man Tuen Leung, 2002. "Nominal Wage Rigidity in Contract Data: A Parametric Approach," University of Cyprus Working Papers in Economics 0210, University of Cyprus Department of Economics.
  2. Stephen Nickell & Glenda Quintini, 2001. "Nominal wage rigidity and the rate of inflation," LSE Research Online Documents on Economics 20131, London School of Economics and Political Science, LSE Library.
  3. Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying inflation's grease and sand effects in the labor market," Staff Reports 31, Federal Reserve Bank of New York.
  4. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
  5. Sergio DESTEFANIS & Giuseppe MASTROMATTEO & Giovanni VERGA, 2005. "Wages and Monetary Policy in Italy Before and After the Wage Agreements," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 113(2), pages 289-318.
  6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  7. Knoppik, Christoph & Beissinger, Thomas, 2001. "How Rigid are Nominal Wages? Evidence and Implications for Germany," IZA Discussion Papers 357, Institute for the Study of Labor (IZA).
  8. Bauer, Thomas K. & Bonin, Holger & Sunde, Uwe, 2003. "Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Micro Data," IZA Discussion Papers 959, Institute for the Study of Labor (IZA).
  9. David Card & Dean Hyslop, 1995. "Does Inflation 'Grease the Wheels of the Labor Market'?," Working Papers 735, Princeton University, Department of Economics, Industrial Relations Section..
  10. Fabiani, Silvia & Locarno, Alberto & Oneto, Giampaolo & Sestito, Paolo, 2000. "The sources of unemployment fluctuations: an empirical application to the Italian case," Working Paper Series 0029, European Central Bank.
  11. David Amirault & Brian O'Reilly, 2001. "Downward Nominal-Wage Rigidity: Micro Evidence from Tobit Models," Working Papers 01-7, Bank of Canada.
  12. John Haltiwanger & Milan Vodopivec, 2002. "Worker Flows, Job Flows and Firm Wage Policies: An Analysis of Slovenia," William Davidson Institute Working Papers Series 486, William Davidson Institute at the University of Michigan.
  13. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc.
  14. Goette, Lorenz & Sunde, Uwe & Bauer, Thomas K., 2007. "Wage rigidity: Measurement, causes and consequences," Munich Reprints in Economics 20448, University of Munich, Department of Economics.
  15. Giulio Piccirilli & Nicola ACOCELLA & Riccardo LEONI, 2008. "Social Pacts, Employment and Growth. A reappraisal of Ezio Tarantelli’s thought," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 116(3), pages 365-372.
  16. David Card, 1995. "The Wage Curve: A Review," Working Papers 722, Princeton University, Department of Economics, Industrial Relations Section..
  17. repec:rie:review:y:1999:v:1:i:1 is not listed on IDEAS
  18. 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.
  19. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 761-87, November.
  20. Davis, Steven J. & Haltiwanger, John, 1999. "Gross job flows," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 41, pages 2711-2805 Elsevier.
  21. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
  22. McLaughlin, Kenneth J., 1994. "Rigid wages?," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 383-414, December.
  23. Francesco Devicienti, 2002. "Downward Nominal Wage Rigidity in Italy: Evidence and Consequences," LABORatorio R. Revelli Working Papers Series 20, LABORatorio R. Revelli, Centre for Employment Studies.
  24. 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.
  25. Silvia Fabiani & Alberto Locarno & Gian Paolo Oneto & Paolo Sestito, 1997. "NAIRU: Incomes Policy and Inflation," OECD Economics Department Working Papers 187, OECD Publishing.
  26. Brunello, Giorgio & Lupi, Claudio & Ordine, Patrizia, 2001. "Widening differences in Italian regional unemployment," Labour Economics, Elsevier, vol. 8(1), pages 103-129, January.
  27. 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.
  28. repec:rie:review:v:4:y:1999:i:1:n:1 is not listed on IDEAS
  29. 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.
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