Wage dynamics and worker mobility during deep recessions

Abstract

We provide empirical evidence of the relationship between downward wage rigidity and unemployment volatility by comparing wage dynamics and worker mobility during the Great Recession in two countries where wages adjusted very differently: Latvia and Spain. Using a panel of social security administrative data, we find that wages in Spain were rigid even during periods of rising unemployment. In contrast, Latvian wages were reduced and wage cuts affected 60 percent of jobs. At the same time, the elasticity of workers' transition rates into and out of unemployment to productivity shocks was four times higher in Spain than in Latvia, and these responses were more persistent in Spain. This evidence is consistent with theoretical models that show that unemployment volatility is higher when wages are rigid.

Employment and Wages over the Business Cycle in Worker‐Owned Firms: Evidence from Spain*

“…Total employment is computed by aggregating plant‐level employment in each of the employer categories by year, which refers to the data extraction moment of the MCVL. The figure highlights the huge volatility of the Spanish labour market as a consequence of its particular institutional setting characterized by: (i) province‐sector wide collective agreements that impose downward wage rigidity that prevents wage adjustments, thereby shifting the burden of the labour market adjustment towards the employment margin (Diez‐Catalan and Villanueva 2015; Pajuste and Ruffo 2019), and (ii) a labour market where 30 per cent of the workforce is under temporary contracts with low employment protection, which increases employment volatility (Bentolila et al . 2012; Costain et al .…”