A statistical-mathematical procedure to estimate the output effect of wage rigidities

In this manuscript, a contribution to the extensive literature on the equilibrium effects of labour market frictions, with particular reference to employment and wages, is provided by the authors. More precisely, a new empirical method to assess the output impact of nominal rigidities in the labour market (wage rigidities) is proposed by them. The authors’ procedure is theoretically based, in the sense that it can be drawn from the few assumptions of the standard neoclassical model of economic growth. An application of their method is provided by the authors by carrying out an appropriate regression analysis through annual panel data on the twenty Italian regions in the sample period 1995–2020. The interest in these territorial units stems from the fact that the Italian labour market is affected by substantial nominal rigidities because of its centralized bargaining system, which sets wages without considering the presence of large local differences in labour productivity. It is found by the authors that the negative output impact of wage rigidities significantly varies across macro-areas (Northern and Central-Southern regions), especially when human capital is considered.