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Allocative efficiency and aggregate wage dynamics in Italy

Effrosyni Adamopoulou, Emmanuele Bobbio (), Marta De Philippis () and Federico Giorgi ()
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Emmanuele Bobbio: Bank of Italy
Federico Giorgi: Bank of Italy

No 340, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Aggregate wages display little cyclicality compared with what a standard model would predict. Wage rigidities are an obvious candidate, but a recent strand of the literature has emphasized the need to take into account the growing importance of worker composition effects during downturns. With reference to the Italian case we document that firm composition effects also matter increasingly in explaining aggregate wage dynamics, i.e. aggregate wage growth has been raised by the increase in the employment weight of high-wage firms. To the extent that this reallocation occurs towards more productive firms, the composition effects may also reflect an efficiency enhancing mechanism. We use a newly available dataset based on social security records covering the universe of Italian employers from 1990 to 2013 and employ a standard measure of allocative efficiency on wages paid across firms. We show that this measure has improved progressively since before the recent downturn, being aligned at the sectoral level with measures of productivity growth and market openness to competition. We then focus on the recent downturn and find that large firms were able to adjust wages more than small firms and that small firms instead adjusted employment to a larger extent. Finally, we document that the continued improvement in the measure of allocative efficiency over this period correlates positively with measures of economic activity (evolution of employment and value added) across sectors.

Keywords: Wage dynamics; allocative efficiency (search for similar items in EconPapers)
JEL-codes: D22 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eur
Date: 2016-07
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