Michele Pellizzari (University of Geneva)

“Wage compression within the firm”

abstract

We study the distributional effect of a wage indexation mechanism – the textit{Scala Mobile} (SM) – that heavily compressed the distribution of Italian wages during the 1970s and 1980s. By imposing nominal adjustments to all workers in the economy, the SM increased real wages at the bottom of the distribution and was essentially non-binding for high-wage workers, for it simply imposed a negative minimum real change. Using administrative data covering the universe of all firms and workers in one Italian region we document that this system triggered a strong redistribution within the firm, with skilled workers receiving lower wage adjustments when employed at firms with many unskilled workers. As a consequence, skilled workers tended to move towards firms with few low-wage employees and new firms entered the market with more skill intensive technologies. We rationalize these results with a simple model in which skilled and unskilled workers are complement in production but their wages are set by different mechanisms. For the unskilled wages are exogenously set by the SM whereas the labor market of the skilled is characterized by frictions and their wages are negotiated. The equilibrium features dispersion of skilled wages across firms while bargaining and insurance generate compression of wages within the firm.