Wage persistence and labour market institutions: an analysis of young European workers

Abstract

This article investigates the effects of Labour Market Institutions (LMIs) on wage persistence among young European workers at the beginning of their careers. We use European Community Household Panel (ECHP) data from 1995 to 2001 for 13 EU countries and estimate a three-level random intercept probit model that allows for unobserved heterogeneity both at the individual and country level. Overall, we find that LMIs explain wage persistence. In particular, we find a high level of Employment Protection Legislation (EPL) and a high level of Bargaining Centralization (BC) increase wage persistence.

Acknowledgements

We are grateful to the participants of the I Portuguese Economic Journal Conference, XXII AIEL Conference and XIX EALE Congress for their comments. The usual disclaimer applies.

Notes

¹ Previous studies on wage mobility tackled the initial condition problem by dealing with the endogeneity of the initial conditions using bivariate probit models (Cappellari, 2000; Vieira, 2005).

² Parker and Gardner (2002) applied a similar approach.

³ECU/EURO exchange rates are provided by European Commission DG II, whereas comparative price level indices are provided by Eurostat.

⁴Using Overall EPL Indicator Version 1 that allows changes over time but excludes regulations on collective dismissals leaves our results unchanged.

⁵OECD does not provide information about level of BC in Greece. However, Ioakimoglou et al. (2001) highlight that national occupational level and industry level are considered to be the most important levels at which wages are formed.

⁶We find similar results when we compute wage persistence taking into account deciles transition matrices for each country separately.