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.