Does the structure of labor markets – and the possibility to employ temporary workers – affect aggregate wage growth? After the global financial crisis (GFC) a rich debate had ensued about the reasons for the delayed pick up of wage growth. However, structural labor market aspects remained strangely absent from this discussion. We contribute by incorporating labor market dualization into the standard Phillips curve model to explain wage growth in 30 European countries in the period 2004-2017.
We find that the presence of workers with temporary contracts in Europe’s labor markets slows down aggregate wage growth due to the competition that temporary workers exert on permanent workers. This competition effect is most pronounced in countries, where trade union density is low. Moreover, we establish that labor market dualization has been at least as important in slowing wage growth since the GFC as unemployment, i.e. the observed flattening of the Phillips curve.
Lehner, L., Ramskogler, P. & Riedl, A. (2022). 'Begging thy coworker – Labor market dualization and the slow-down of wage growth in Europe'. INET Oxford Working Paper No. 2022-04