Begging thy coworker - Labor market dualization and the wage growth slow-down in Europe

As temporary employment has become a pervasive feature of modern labor markets, reasons for wage growth have become less well understood. To determine whether these two phenomena are related, we investigate whether the dualized structure of labor markets affects macroeconomic developments. Specifically, we incorporate involuntary temporary workers into the standard wage Phillips curve to examine wage growth in 30 European countries for the period 2004-2017. Relying on individual-level data to adjust for a changing employment composition, we show, for the first time, that the incidence of involuntary temporary workers has strong negative effects on aggregate wage growth. This effect, which we name the competition effect, is particularly pronounced in countries where wage bargaining institutions are weak. Our findings shed further light on the reasons for the secular slowdown of wage growth after the global financial crisis.