Paolo Sestito

This paper estimates the extent of downward wage rigidity in Italy using a micro-econometric model and the recently released WHIP longitudinal data. The econometric approach distinguishes between downward nominal wage rigidity – i.e., the impediment to nominal wage cuts – and downward real wage rigidity – i.e., when nominal wages cannot grow by less than a minimum positive threshold. The model accounts for measurement error and flexibly specifies the counterfactual, rigidity-free wage change distribution. The period analyzed goes from the mid eighties to the end of the century, within which the 1992-1993 income agreements – with the abolition of the scala mobile – are situated. Overall, downward wage rigidity impacts on about 70% of the observations. However, in the periods following the income agreements, the impact of wage rigidity is reduced, in particular with regards to real rigidities (with a slight increase in nominal rigidities). In each sub-period, however, real rigidities prevail over nominal rigidities.