Wage adjustment to shocks in Spain

Pilar Cuadrado, Pablo Hernández de Cos and Mario Izquierdo ()

Economic Bulletin, 2011, issue APR, No 05, 143-154

Abstract: The latest economic literature highlights the importance of labour market institutions in the economy’s capacity to adjust to different macroeconomic shocks. Among the numerous institutional arrangements that make up the labour market, wage determination mechanisms tend to play a prominent role when it comes to explaining how much of the adjustment ends up being pushed onto employment. In this respect, collective bargaining systems conducive to the adaptation of wages to cyclical fluctuations and shocks of various kinds smooth the changes in the level of employment. By contrast, systems with greater wage rigidity tend to generate more pronounced fluctuations in employment over the business cycle. The high employment variability is one of the singular features of the cyclical behaviour of the Spanish economy. In the latest crisis, for example, the magnitude of the destruction of net employment in Spain was much larger than in other euro area countries in which the decline in GDP or the correction in the residential construction sector were comparable. However, this relatively larger response by employment in Spain, along with greater wage inertia, is not a phenomenon particular to this crisis episode, but rather reflects a historical pattern. Behind this behaviour lie certain institutional characteristics of the Spanish labour market, such as the excessive difference in the degree of protection afforded to permanent and temporary contracts and the inability of the collective bargaining system to facilitate the adaptation of wages to the economic situation and to the circumstances of each firm. From this perspective, this article addresses a specific aspect of the wage determination mechanism: the capacity of wages to respond to macroeconomic shocks and its determinants. With this aim, the following section provides evidence on the degree of response of wages to cyclical developments and inflation, as well as an estimation of the degree of wage rigidity in Spain, both in real and nominal terms, comparing it with the estimates available for other countries. The third section examines the relationship between the degree of wage flexibility and certain institutional characteristics of labour markets on the basis of the information available for four European countries (Spain, Belgium, Denmark and Portugal). Finally, Section 4 summarises the main conclusions.

Date: 2011
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