Rigid wages? Inflation and wage growth in Italy, 1974–2024

Abstract

In this paper we use the rich information contained in the administrative archives of the Italian National Social Security Institute (INPS) to study the relationship between inflation and wage growth in Italy over the last 50 years. Our analysis uncovers a number of important facts about the Italian labor market. We find that during our sample period, the distribution of nominal wage growth changed substantially, and as inflation went down, so did the center and spread of this distribution. With the decrease of inflation, the frequency of nominal wage cuts also increased, revealing a high degree of wage flexibility achieved mainly through changes in non-standard forms of compensation, such as bonuses and overtime. Our analysis is able to uncover what type of worker manages to better defend themselves from inflation. In particular, we find that stayers have a smaller probability of nominal and real wage cuts than movers, even if workers voluntarily quit their job. The empirical evidence we provide is consistent with the view that inflation is a way to “grease the wheels of the labor market”.