Before presenting our estimated results of real wage cyclicality, it is worth presenting some of the main characterizing features of the wage setting in Spain over the period 1987 to 2013. Firstly, collective agreements cover about 90% of the salaried workforce in the private sector, despite relatively low unionization levels, due the automatic extensions of collective agreements. Collective agreements are mainly bargained at the province-sector level, with a very low share of firm-level agreements. This predominance of negotiations at an intermediate level of decentralization has been found to provide a low association of wages and labor conditions to firms’ individual performance (See, for instance, Bentolila et al. 2010 and Izquierdo et al. 2004). Recent labor market reforms have indeed tried to increase the decentralization of the collective bargaining system in Spain, although it is still not possible to assess the impact of these reforms on wage cyclicality. Moreover, traditionally, the Spanish labor market has been characterized by a strong wage indexation to inflation, resulting in a high inertia of wages and real downward wage rigidities (Messina et al. 2010).
Table 2 depicts the estimates of our two-step equation model, showing real wage semi-elasticity to unemployment variations along the four business cycle phases defined previously12. The first thing to notice is that, regardless of what phase the economy is in, real wages are very weakly procyclical in Spain. Our estimates point to an increase (decrease) of between 0.24-0.48 pp in real wages after a decrease (increase) of 1 pp in the unemployment rate. These estimates are similar to those reported by De la Roca (2014) for the Spanish case when no differences across the business cycle phases are allowed, and they are much lower than those found for other countries. For instance, Pissarides (2009) summarizes the evidence of real wage cyclicality in the US and some European countries, finding wage to unemployment semi-elasticities being above 1 in the US case, although with large differences between job-movers and job-stayers. Results for different European countries also tend to find this semi-elasticity above 1, especially in the UK (close to 2 according to Devereux and Hart (2006) and Peng and Siebert (2006)), but also in Germany, Italy or Portugal13.
Table 2
Real wage cyclicality: 4 scenarios
On top of this low wage sensitivity to business cycle conditions, we also find significant differences depending on the cyclical phase of the economy. That is, wage cyclicality in Spain does not exhibit a symmetric pattern along the business cycle, and wages respond differently depending on what phase of the cycle the economy is operating in.
In particular, looking at the results shown in Table 2, downward wage rigidities seem to be playing a relevant role in the Spanish labor market, as wage cyclicality is much lower in recessions than in expansions, and the level of the unemployment rate appears to be relevant only in expansionary periods. These results are in line to those reported by Shin and Shin (2008) for the US, although in that case, no distinction was made according to the level of the unemployment rate.
More specifically, if we analyze how wage cyclicality varies along the four phases defined in this paper, Column 2 would describe how wages are related to unemployment variations in a recovery phase, like the situation in Spain in 2014, where employment is starting to grow, but the unemployment rate is still above the historical average. In this situation, wages increase as a response to reductions in the unemployment rate, with a semi-elasticity of 0.38%. If this situation persists, and the expansionary period leads to unemployment falling below its average, the economy would enter in the phase defined by Column 3. In this new phase of higher upward pressure on wages derived from the lower unemployment rate and an increasing level of employment, wage semi-elasticity to unemployment rises to 0.48%. This higher wage sensitivity to the unemployment rate is found to be significantly higher than the one observed under higher unemployment at the 1% confidence level.
Nevertheless, once the expansionary period ends and the economy starts shrinking, a significantly lower wage reaction to unemployment is found. In particular, a one percentage point increase in the unemployment rate decreases real wages by 0.25% (column 4). Thus, wage response is almost half that of the one observed in the previous expansionary period, this difference being statistically significant at the 1% level. Therefore, these results would be coherent with the existence of significant downward wage rigidities in Spain, since wage cyclicality is much lower in recessions than in expansions. Eventually, as the economy continues deteriorating and the unemployment rate keeps rising, the economy moves into a period that combines a worsening economy and a high level of unemployment. Nonetheless, as we can see in Column (1), the semi-elasticity of wages does not experience any variation (remains at -0.25%), and the increasing level of unemployment fails to induce any additional pressure on wages adjustment.
In other words, the semi-elasticity of wages to unemployment when the economy is in recession is low, and it is not found to vary with the unemployment level. When the economy moves out of the recession, real wages are found to show a greater link to business cycle conditions, although lower than in other countries. In these expansionary periods, a low level of unemployment rate is associated with additional wage pressures, while this is not the case in recessionary periods. These results indicate the existence of significant asymmetries in wage formation in Spain, possibly reflecting the impact of the prevailing labor market institutions, such as the interaction between the very high duality between permanent and temporary workers and the prevalence of sectoral levels of negotiations. Overall, this collective bargaining system could be characterized as providing a high level of protection to working conditions of the incumbents or insiders in the labor market, while concerns over the access to a job for those in unemployment are set aside in the bargaining process. As a result, both high levels of unemployment and wage growth can coexist during the first stages of economic recovery, therefore delaying the necessary reduction in unemployment.
In order to fully understand these differences in wage cyclicality across the business cycle and interpret the low wage elasticity observed in Spain with respect to other countries, we next break down differences in wage response to the business cycle for different firm-specific tenure categories. To this end, we interact our six tenure categories with the year-quarter pair dummies in the first stage regression (equation 2 in previous section) and estimate six separate regression models in the second step (equation 3). Estimated results are reported in Table 3.
Table 3
Real wage cyclicality by tenure groups: 4 scenarios
In this table, we observe that differences across the four cyclical phases defined in this paper are similar across the six tenure categories used. That is, real wage semi-elasticity to unemployment is higher when the economy is expanding and presents low levels of unemployment, regardless of the accumulated experience a worker has within a firm. Similarly, and during recessions, the real wage exhibits a lower elasticity to the unemployment rate evolution, and this downward real wage rigidity seems to be unaffected by the level of unemployment. Again, once the economy initiates its recovery, real wages start increasing again for all tenure categories with a higher sensitivity to our cycle indicator than they showed during recessions. In any case, it should be noted that, as in other countries (Pissarides, 2009, Carneiro et al. 2012), wage cyclicality is found to be higher for newly-hired workers, with point estimates for wage semi-elasticity ranging from −0.41 (in recessions) to −0.65 in expansionary periods with low unemployment. By contrast, long-tenure workers are found to show very weak wage cyclicality, from −0.13 in recessions to a maximum of −0.33 in expansionary periods. Wage cyclicality estimates are, on a general basis, found to show a monotonic inverse relationship with tenure in the Spanish labor market.
In Table 3, we also present the significance of these differences across tenure categories and to what extent there is some variation across the business cycle. In this regard, differences in wage cyclicality between new-hired, job movers, and low tenure (less than 2 years) workers tend to be non significant, while long-tenure workers tend to exhibit a significantly lower wage sensitivity to unemployment. Interestingly, downward wage rigidities seem to be playing a relevant role protecting wage falls for workers with a tenure higher than two years in the most adverse cyclical situation (recessions with high unemployment), while, by contrast, in expansionary periods only long tenure workers (more than 6 years) show a significantly lower wage reaction to unemployment.
Another interesting dimension, although closely related to tenure, is to look at differences in wage cyclicality in Spain by type of contract. The Spanish labor market is characterized by a high level of duality, where a large proportion of the salaried workforce (about 24% in 2014, but above 30% over the expansionary period) is under fixed-term contracts with a high turnover rate, while the rest holds over in permanent contracts with high redundancy costs.
Table 4 reflects that wages of workers under fixed-term contracts are more sensitive to the unemployment rate than those wages of workers subject to permanent contracts. In fact, in column (1) we observe that wages of workers under fixed-term contracts are almost two times more responsive to job destruction when the economy is in recession and unemployment is high than wages of workers with a permanent contract (-0.43 vs -0.21). Once the economy starts recovering, and despite the existence of a high level of unemployed stock, real wages become more sensitive than they were during the recession for both contract type workers (Column 2), although the increase in the sensitivity is found to be higher for permanent workers. Thus, the wage elasticity in this phase of the cycle is also higher for workers with temporary jobs, but the asymmetry of the real wage response is higher for workers with a permanent job. Once the unemployment rate has lowered and the economy continues expanding (column 3), real wages of permanent workers become even more sensitive to unemployment reductions, while the increase in wage sensitivity of workers with fixed-term contracts is lower. In the next phase (column 4), when the economy enters into recession but still enjoys a low level of unemployed workers, real wages decrease in a less sensitive way for both groups, but more markedly for those with a permanent contract. Overall, as it can be seen in Table 4.A, semi-elasticity of wages to the unemployment rate is statistically higher for those with a temporary contract than for permanent workers, the exception being expansionary periods with low unemployment, when traditionally highly rigid wages of permanent workers show a wage sensitivity to cyclical conditions similar to the one estimated for temporary workers. In other words, asymmetries in wage adjustment between expansions and recessions are clearly higher in Spain among permanent workers, who are especially protected from wage cuts in recessions.
Table 4
Real wage cyclicality by contract types: 4 scenarios
Finally, Table 5 depicts wage semi-elasticity by age groups. We observe that wages of older workers are the most protected from the business cycle in all four phases, while wages of workers aged 16 to 29 years old are the most affected by changes in the unemployment rate. For all age group categories, we observe that wages are more sensitive to expansions than they are to recessions. Furthermore, a higher unemployment rate does not statistically affect the path at which real wages adjust during a recession, while the opposite is true with a lower unemployment rate when the economy is expanding. This is, in fact, a clear example of downwardly rigid wages.
Table 5
Real wage cyclicality by age groups: 4 scenarios
All in all, the estimations for different groups suggests a lower wage semi-elasticity (especially in recessions) for those groups more protected from unemployment (permanent, older, and high tenured). Regarding firm’s characteristics, the information available in our database is limited. By firm’s size, no significant differences in wage cyclicality are found, while by sectors of activity, wages in the construction sector are found to be additionally downwardly rigid in Spain in recessionary periods, while no significant differences are found in upturns14.