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Composition Bias And Italian Wage Rigidities Over The Business Cycle

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Executive Summary

The author estimates the cyclicality of Italian real wages over the period 1985-2003 controlling for the so-called "Composition bias". Aggregate real wage statistics, commonly used to measure real wage elasticity, are affected by the bias arising from the cyclical change in the skill-composition of the labor force. An analysis on WHIP longitudinal data shows that the degree of Italian real wage procyclicality significantly increases after controlling for composition bias: this result is robust to several checks and it is consistent with Solon, Barsky and Parker's 1994 seminal paper on the US. Finally, the author discusses the effects of the 90's labor market's reforms on Italian real wage cyclicality.

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