The Wage Curve in Italy and Spain. Are European Wages Flexible

In this paper I address the question of whether wages are affected by current and past labor market conditions. Using microeconomic data from Italy and Spain I obtain three main results. First, the unemployment elasticity of wages is negative and significant, but much smaller than the one document in the existing literature. In particular, I show that in Italy a doubling of unemployment is associated with a drop in wages of 5.2 percent. Second, according to my results, Italian wages are significantly and negatively correlated not only with the contemporaneous unemployment, but also with unemployment at the time the worker is hired. Finally, Spanish wages are not significantly correlated with past unemployment. An important determinant of wages in Spain is the contemporaneous unemployment. In particular, I find that the unemployment elasticity of wages in Spain is equal to 10 percent. The results obtained can be interpreted in terms of wage flexibility in Europe.