Joint work with Francesco Del Prato; VisitINPS 2020 project. Under revision. NEW VERSION COMING SOON!
Abstract. We explore the effect of a reduction in overall labor costs, indirectly induced by an Italian reform that weakened employment protection legislation, on the productivity distribution of manufacturing firms. Due to the unique institutional features of the Italian collective bargaining system, in the manufacturing sector the reform led to a clean reduction in average worker compensation, without altering the average structure of employment relationships. This decrease in labor cost resulted in a reduction in average total factor productivity (TFP) among less productive firms, and an increase at the upper end of the distribution. We pair these findings with increased entry and exit dynamics among low-productivity firms, suggesting the presence of an adverse selection mechanism at the bottom of the TFP distribution, enhanced by the reform. We formalize this concept via a general equilibrium model that links productivity to frictions in the markets for inputs.
Abstract. How much wage dispersion is visible in characteristics we observe? Using Portuguese matched employer-employee records linked to firm financial data, we sort workers and firms into observable cells and decompose log wages across worker-firm cells. Worker cells account for 35.0% of the variance, firm cells 6.7%, sorting 8.8%, and a worker-firm interaction 6.7%; the remaining 42.8% lies within cells. A second exercise splits the firm component into what firms pay similar workers (pay policy) and whom they employ (workforce composition). Pay policy dominates, accounting for about two-thirds of the firm component’s variance, and the two margins reinforce: higher-paying firms employ higher-wage workforces. Holding observable cells fixed across Portugal’s recovery, the fall in log-wage variance is explained by changing cell wage schedules rather than by workforce reallocation or re-sorting. The two-sided structure usually credited to latent worker and firm effects is thus visible in observed characteristics on the worker side, much less so on the firm side.