Worker flows and wage dynamics: estimating wage growth without composition effects

Abstract

Abstract Wage dynamics are closely intertwined with job flows. Composition effects associated with the different characteristics of workers and jobs may blur the ‘true’ underlying wage pressure in the economy. We gauge composition effects in wage growth taking into consideration not only changes in employee and job characteristics, but also worker flows among employment states (stayers in the same job, movers to another job, new entrants and exits) controlling for the selection of workers into the different states. Using Spanish Social Security data during the 2006–18 period, we find that the ‘true’ underlying wage growth in the Spanish economy during recessions (expansions) was, on average, significantly lower (higher) than that the observed with raw data. This may help to explain some macro puzzles, such as the ‘vanishing Phillips curve’.