Exporters versus domestic wage adjustment during the Great Recession in Spain

During the Great Recession southern European economies belonging to the Euro area could not devaluate their domestic currency as they did in previous recessions. In the absence of an exchange rate devaluation policy option, they were forced to an internal devaluation (i.e. to reduce domestic prices and wages in order to stimulate exports and job creation). In this paper we document the extent of the wage adjustment and the differences in the adjustment patterns followed by exporting versus domestically-oriented firms in Spain during the Great Recession. We use linked employer -- employee data to document that wages at exporting firms are higher than at domestic firms, due in part to a composition effect, and mainly to the existence of a wage premium. We show a significant reduction in the exporter wage gap between 2006 and 2010 due to changes in characteristics but more importantly to a sharp reduction of the wage premium paid by exporters. This finding suggests that exporting firms are showing a higher wage moderation than domestically-oriented firms.