The effects of changes in the composition of employment on euro area wage growth: panel data analysis
Series: Occasional Papers. 2028.
Author: Ángel Luis Gómez.
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Abstract
In the euro area, the composition of employment has changed significantly since the
onset of the financial crisis, particularly in terms of employees’ age and educational level,
in addition to the incidence of temporary contracts. This paper exploits two new panel
datasets to estimate the extent to which changes in the composition of employment
were behind weak wage growth in the euro area and in its main member countries during
the economic recovery following the financial crisis. This type of analysis, which follows the
same individual over several periods of time, allows the effect of individual productivity to be
treated econometrically and certain biases that could affect the use of cross-sectional data
to be avoided. It is concluded that changes in the composition of employment had some
positive effect on wages in the euro area between 2010 and 2012. However, from 2013
until 2017, the last period for which microdata are available, this effect turned negative and
increased in magnitude, dampening aggregate wage growth. In the last two years the effect
was particularly significant, with an impact of around 1 percentage point. Correcting for the
effect of changes in the composition of employment on wages leads to a closer relationship
between wages and cyclical conditions.