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Labour productivity and the wageless recovery

Author

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  • Antonio M. Conti

    (Bank of Italy)

  • Elisa Guglielminetti

    (Bank of Italy)

  • Marianna Riggi

    (Bank of Italy)

Abstract

We document that the feeble relation between wage growth and unemployment experienced by the euro area since the Global Financial Crisis has been coupled with a change in the response of labour productivity (output per worker) to an increase in employment, from nil up to 2009 (acyclical) to negative since then (countercyclical). We argue that both facts can be explained by the strong persistence of the last recession and of the subsequent recovery. The relevance of the duration of the cyclical phase can be rationalized in a theoretical model where firms use both the extensive and intensive margin of labour and face employment adjustment costs. When demand shocks are persistent firms adjust relatively more the extensive margin, leading to a countercyclical response of labour productivity and only to a small reaction of wages. We take the model to the data using a Bayesian VAR, where persistent demand shocks are identified exploiting the theoretical prediction which associates them with a countercyclical profile of labour productivity. We show that persistent demand shocks (i) induce a lower reaction of wages to employment and (ii) have been a non negligible driver of employment and wage dynamics in the aftermath of the Global Financial Crisis.

Suggested Citation

  • Antonio M. Conti & Elisa Guglielminetti & Marianna Riggi, 2019. "Labour productivity and the wageless recovery," Temi di discussione (Economic working papers) 1257, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1257_19
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    Cited by:

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    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. Kabundi, Alain & De Simone, Francisco Nadal, 2022. "Euro area banking and monetary policy shocks in the QE era," Journal of Financial Stability, Elsevier, vol. 63(C).
    4. Morley, James & Rodríguez-Palenzuela, Diego & Sun, Yiqiao & Wong, Benjamin, 2023. "Estimating the euro area output gap using multivariate information and addressing the COVID-19 pandemic," European Economic Review, Elsevier, vol. 153(C).
    5. Antonio M. Conti & Andrea Nobili, 2019. "Wages and prices in the euro area: exploring the nexus," Questioni di Economia e Finanza (Occasional Papers) 518, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    missing wage growth; productivity; demand shocks; Bayesian VAR models; DSGE models.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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