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Title: How do regulated and unregulated labor markets respond to shocks? Evidence from immigrants during the Great Recession

Author(s): Sergei Guriev, Biagio Speciale and Michele Tuccio

Publication Date: July 2016

Keyword(s): great recession, Immigration, Labor market regulation and wage rigidity

Programme Area(s): Development Economics and Labour Economics

Abstract: We study wage adjustment during the recent crisis in regulated and unregulated labor markets in Italy. Using a unique dataset on immigrant workers, we show that before the crisis wages in the formal and informal sectors moved in parallel (with a 15 percent premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32 percent. The difference was particularly salient for workers in "simple" occupations where there is high substitutability between immigrant and native workers. Calibrating a simple model of spillovers between formal and informal markets, we find that less than 10 percent of workers who lost a formal job during the crisis move to the informal sector. We also find that if the formal sector wages were fully flexible, the decline in formal employment would be in the range of 1.5-4.5 percent - much lower than 16 percent decline that we observe in the data.

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Bibliographic Reference

Guriev, S, Speciale, B and Tuccio, M. 2016. 'How do regulated and unregulated labor markets respond to shocks? Evidence from immigrants during the Great Recession'. London, Centre for Economic Policy Research. http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11403