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Table of Contents
                            EURO AREA LABOUR MARKETS AND THE 
CRISIS
Executive Summary
Main developments in euro area labour 
markets since the start of the crisis
The impact of the crisis on some structural features of euro area labour 
markets
Main policy conclusions
Introduction
1 Labour market developments since the start of the crisis
	1.1 Employment and unemployment developments
	1.2 Labour supply reaction to the crisis
	1.3 The adjustment of wages to the crisis
2 The crisis and structural features of euro area labour markets
	2.1 Developments in euro area Beveridge curves
	2.2 The evolution of skill mismatches in the euro area
	2.3 Developments in structural unemployment
	2.4 Wage setting and unemployment elasticities
Appendix
References
                        
Document Text Contents
Page 1

Occas iOnal PaPer ser i e s
nO 138 / OctOber 2012

eUrO area labOUr MarKets

anD tHe crisis

Task Force of the
Monetary Policy Committee
of the European System
of Central Banks

Page 2

In 2012 all ECB
publications

feature a motif
taken from the
€50 banknote.

OCCAS IONAL PAPER SER IES
NO 138 / OCTOBER 2012

EURO AREA LABOUR MARKETS
AND THE CRISIS

This paper can be downloaded without charge from http://www.ecb.europa.eu or from the Social Science
Research Network electronic library at http://ssrn.com/abstract_id=2155001.

NOTE: This Occasional Paper should not be reported as representing
the views of the European Central Bank (ECB).
The views expressed are those of the authors

and do not necessarily reflect those of the ECB.

Task Force of the Monetary Policy Committee
of the European System of Central Banks

Page 61

60
ECB
Occasional Paper No 138
October 2012

Box 6

REAL wAGES AND EMPLOyMENT COMPOSITION EffECTS DURING THE CRISIS1

Many macroeconomic theories formulated to explain labour market mechanisms have had to
deal with a cross-country stylised fact: real wages, which are supposed to react to shocks, appear
to be uncorrelated – or even perversely correlated – with movements in the business cycle.2
However, since Bils (1985) and Solon et al. (1994), several papers have argued that cyclical
changes in the composition of employment may explain the apparently acyclical evolution of real
wages.�In�practice,�the�dynamics�of�the�aggregate�real�wage�not�only�reflect�changes�in�wages�
at� the� individual� level,�but�are�also� influenced�by�changes� in� the�composition�of�employment.�
Composition effects appear to have been particularly important during the crisis recession episode
and, in this respect, may also partly explain the apparent lack of wage adjustment observed since
the�start�of�the�crisis.�In�this�box,�we�first�describe�the�extent�of�composition�effects�in�the�recent�
abrupt rise in unemployment and then we investigate their relevance in explaining the moderate
changes�in�real�wages�before�and�after�the�recession�in�five�euro�area�countries,�namely�Belgium,�
Germany, France, Italy and Portugal.3

Changes in the unemployment rate during the recession of 2008-2009

We�first�assess�how�the�probability�of�becoming�unemployed�differed�across�workers�in�order�
to assess the importance of compositional changes during the last recession (Table A7 in the
Appendix).4 While the overall unemployment rate increased by between 1 and 2.5 pp between
the fourth quarter of 2007 and the fourth quarter of 2009 in Belgium, France, Italy and Portugal,
the unemployment rate for young males increased by between 5.6 and 7.8 pp, and that for male
immigrants by between 3.7 and 8.2 pp. Meanwhile, female workers were less affected, and the
unemployment� rate� for� young� females� increased� significantly� less� than� that� for� young�males,�
except in Belgium. In sum, workers who became unemployed in 2009 were more likely to be
young or immigrants. In contrast, in Germany the unemployment rate slightly decreased between
2007 and 2009.

Composition effects and changes in the wage distribution during the Recession

All in all, the above evidence suggests that the characteristics of the employed have changed
in the aftermath of the crisis, because many workers with low wages, such as young workers,
immigrants and construction workers, became unemployed. To investigate the effect of the exit
from employment of these workers on the wage structure, we decompose the changes in the
distribution of the log real wages during the crisis into changes due to employee characteristics

1 Prepared by Matteo Mogliani and Gregory Verdugo in collaboration with Emmanuel Dhyne, Martine Druant, Cláudia Filipa Duarte,
José Francisco Maria, Katja Sonderhof and Roberta Zizza.

2� This� puzzling� evidence� was� at� the� very� heart� of,� for� instance,� the� efficiency� wage� theory� and� the� insider-outsider� theory� of�
employment.

3 Despite the harmonisation effort, some unavoidable data heterogeneity arises from the use of different national sources. For instance,
the analysis concerns full-time workers aged between 16 and 65, while for Italy the age class considered is 15-64. Secondly, data are
available on a quarterly basis for France and Italy and on a yearly basis for Germany, Belgium and Portugal; there are also differences
in the timing of the collection of wage data (mainly between February and April for Germany, October for Belgium and Portugal,
throughout�the�year�for�the�other�countries).�Finally,�reported�figures�based�on�survey�and�administrative�data�might�differ�from�the�
official�ones�released�by�national�statistical�and�employment�agencies.

4 Similar patterns in the composition of the unemployment increase since the start of the crisis are observed in the other euro area
countries. See Section 1.1.1 for additional details.

Page 62

61
ECB

Occasional Paper No 138
October 2012

I LABOUR MARKET
DEvELOPMENTS

SINCE THE START
Of THE CRISIS

and changes due to wages at constant composition. To do so, we construct a counterfactual wage
density, computed as if the distribution of the characteristics of individuals had stayed the same
as in the initial period (see DiNardo et al., 1996; Chiquiar and Hanson, 2005; Machado and
Mata, 2005).5�We�use�a�fl�exible�approach�and�control�for�changes�in�the�distribution�of�workers�
across 54 categories of education and experience (proxied by age).6

Observed and counterfactual changes in log real wages are shown in accompanying Table and
Chart while results at different percentiles of the distributions are reported in Tables A8 and A9
for�males�and�females�respectively�in�the�Appendix.�The�fi�rst�column�for�each�country�displays�
the observed change in the distribution of wages over the period, while the second column

5 For Italy, the change is from 2008 Q1 to 2010 Q1. We refer the reader to the Appendix for more technical details on the procedure
applied in the present study.

6� For�each�country,�we�defi�ne�the�categories�by�interacting�nine�age�groups�(under�24,�25-29,�30-34,�35-39,�40-44,�45-49,�50-54,�55-59,�
over�60)�with�six�education�levels�(fi�ve�for�Italy).

Changes in real wages and composition effects during the crisis

Observed
wage change

Price
effect

Composition
effects

Observed
wage change

Price
effect

Composition
effects

Males Females

France 2008-2009 1.65 -1.03 2.68 1.22 -0.44 1.66
Germany 2007-2009 0.43 -1.48 1.91 1.58 -3.99 5.57
Italy 2008-2010 -0.62 -2.34 1.72 0.95 -1.88 2.83
Belgium 2007-2009 0.87 -2.92 3.79 6.81 1.23 5.58
Portugal 2007-2009 5.23 2.05 3.18 6.85 3.29 3.55

Notes: Data from LFS in France and Italy, GSOEP for Germany, Structure of Earnings Survey for Belgium and Quadros de Pessoal for
Portugal.�Only�full�time�workers.�Wages�are�net�of�taxes,�do�include�bonuses�and�extra-wage�earnings�(except�for�Italy),�and�are�defl�ated�
by the HICP.

Changes in real wages and composition effects during the crisis

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Portugal 2007-2009
male female

France 2008-2009
male female

Belgium 2007-2009
male female

Germany 2007-2009
male female

Italy 2008-2010
male female

observed wage change
price effect
composition effects

Sources: LFS in France and Italy, GSOEP for Germany, Structure of Earnings Survey for Belgium and Quadros de Pessoal for Portugal.
Own calculations.

Page 121

120
ECB
Occasional Paper No 138
October 2012

Olivetti, C., and Petrongolo, B. (2008), “Unequal Pay or Unequal Employment? A Cross-Country
Analysis of Gender Gaps”, Journal of Labor Economics, 26(4), 621–654.

Pissarides, C. (1979), “Job Matchings with State Employment Agencies and Random Search,”
Economic Journal, Vol. 89, No. 356 (Dec., 1979), pp. 818-833.

Solon, G., Barsky, R., and Parker, J. A. (1994), “Measuring the cyclicality of real wages: How
important is composition bias?”, The Quarterly Journal of Economics, 109(1), 1–25.

Tobin, J. (1997), “Supply constraints on employment and output: NAIRU versus natural rate”,
Cowles Foundation Discussion Paper.

Turner, D., L. Boone, C. Giorno, M. Meacci, D. Rae and P. Richardson (2001) “Estimating the
structural rate of unemployment for the OECD countries”, OECD Economic Studies, No. 33.

Staiger, D., Stock, J. and Watson, M. (1997), “How precise are estimates of the natural rate of
unemployment?, in Reducing inflation: Motivation and Strategy, University of Chicago Press,
pp. 195-242.

Verdugo, G., Fraisse, H., and Horny H. (Forthcoming), “Évolution des Inégalités Salariales en
France: le Rôle des Effets de Composition”, Revue Économique.

Valletta, R.G. (2005), “Why has the U.S. Beveridge curve shifted back? New evidence using
regional data,” Federal Reserve Bank of San Francisco Working Paper Series 2005-25.

Wall, H.J. and G. Zoega (2002), “The British Beveridge Curve: A Tale of Ten Regions,” Oxford
Bulletin of Economics and Statistics, Vol. 64(3): 261-80

Yashiv, E. (2008), “The Beveridge Curve” new Palgrave Dictionary of Economics, 2nd edition.

Page 122

Occas iOnal PaPer ser i e s
nO 133 / aPr i l 2012

sHaDOW BanKinG

in THe eUrO area

an OVerVieW

by Klára Bakk-Simon,
Stefano Borgioli,
Celestino Giron,
Hannah Hempell,
Angela Maddaloni,
Fabio Recine
and Simonetta Rosati

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