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The effects of changes in the composition of employment on euro area wage growth

Author

Listed:
  • Kouvavas, Omiros
  • Kuik, Friderike
  • Koester, Gerrit
  • Nickel, Christiane

Abstract

Although recent wage growth has increasingly been in line with predictions, there has been a period of low and under-predicted wage growth in the euro area. This period of weak wage growth can be explained to a large extent by the drivers traditionally captured in a Phillips curve analysis, such as economic slack (including broader measures of labour market slack) and inflation expectations. However, these factors do not paint the full picture, as wages were consistently under-predicted during the period 2013-17. As wages differ across sectors and according to employees’ individual characteristics, significant changes in the composition of employment that have taken place in the euro area since the beginning of the crisis could have been an important factor in aggregate wage growth developments. These changes can result from slow-moving trends, cyclical changes or a combination of the two. This article discusses the role of such changes, known as “compositional effects”, in wage growth. It analyses the role of changes in the composition of employment with respect to the individual characteristics of employees (e.g. age, education or gender), employment types (e.g. permanent or temporary contracts) and sectoral shifts. The analysis is mainly based on microdata from the EU survey of income and living conditions, but the article also includes cross-checks and analyses based on the EU Labour Force Survey (EU-LFS) and national accounts data. The analyses indicate that compositional effects pushed up wage growth early in the crisis, but that the effect later decreased and turned negative. This has contributed to a relatively muted response from aggregate wage growth, both to the strong downturn of the labour market early in the crisis and later, from 2014 onwards, to cyclical improvements. Hence compositional effects have been one factor contributing to low wage growth in the euro area. The most important contributions to compositional effects seem to be related to changes in the age and educational structure of the workforce, which can have both a long-term and a cyclical impact. Looking at country-specific evidence, the euro area aggregate results have been influenced by Spain and Italy in particular. JEL Classification: J30, E32

Suggested Citation

  • Kouvavas, Omiros & Kuik, Friderike & Koester, Gerrit & Nickel, Christiane, 2019. "The effects of changes in the composition of employment on euro area wage growth," Economic Bulletin Articles, European Central Bank, vol. 8.
  • Handle: RePEc:ecb:ecbart:2019:0008:2
    Note: 3015628
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    File URL: https://www.ecb.europa.eu//pub/economic-bulletin/articles/2019/html/ecb.ebart201908_02~d5d812d234.en.html
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    Citations

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    Cited by:

    1. Andreas Reinstaller & Michael Weichselbaumer, 2023. "Labor productivity and the standard of living in Austria," Reports 0423, Büro des Produktivitätsrates.
    2. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    3. Ángel Luis Gómez, 2020. "The effects of changes in the composition of employment on euro area wage growth: panel data analysis," Occasional Papers 2028, Banco de España.
    4. Ángel Luis Gómez, 2020. "Efectos de los cambios en la composición del empleo sobre la evolución de los salarios en la zona del euro: un análisis con datos de panel," Occasional Papers 2028, Banco de España.

    More about this item

    Keywords

    Compositional effect; wage cyclicality; wage growth;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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