Italy—Background Economic Developments and Issues

This paper reviews developments in the Italian economy during 1994 with some special attention to some specific issues. It describes trends in the real economy, with special annexes focusing on the outlook for inflation and the response of employment to cyclical and structural factors. The paper discusses fiscal developments, and summarizes developments in the monetary sector. It also reviews empirical evidence on money demand in Italy, and the combination of cyclical and structural factors impinging on the banking system.

Abstract

This paper reviews developments in the Italian economy during 1994 with some special attention to some specific issues. It describes trends in the real economy, with special annexes focusing on the outlook for inflation and the response of employment to cyclical and structural factors. The paper discusses fiscal developments, and summarizes developments in the monetary sector. It also reviews empirical evidence on money demand in Italy, and the combination of cyclical and structural factors impinging on the banking system.

II. The Domestic Economy

1. Aggregate demand, supply, and prices

a. Aggregate demand

The economic recovery began toward end-1993 and accelerated in the course of 1994. As the recovery proceeded, the composition of growth shifted from net exports to domestic demand. In the first three quarters of 1994, GDP grew by 2.2 percent over the corresponding period of the previous year: 0.5 percent of the increase was due to net exports and 1.7 percent to domestic demand. Exports continued to grow at record rates with the expansion of demand in partner countries, but imports also picked up as domestic demand revived. The recovery of domestic spending was driven by the rise in private consumption and inventory accumulation.

In the first three quarters of 1994, private consumption grew by 1.9 percent, as a result of improved consumer confidence and some expansion of disposable income. The latter was due to a substantial increase in nonwage income and reduced tax pressure, which offset the moderate growth of wages and salaries resulting from wage restraint and the decline in employment.

Gross fixed investment recovered only slowly and in the first three quarters of 1994 was still 0.6 percent below its level in the corresponding period of 1993. Investment in machinery, equipment and means of transportation grew by 3.3 percent. The accelerator effect was limited, due to uncertain demand prospects, especially on the domestic side, as domestic orders increased at a relatively slow pace and capacity utilization remained below pre-crisis levels. While profit margins grew very rapidly, their effect on investment has tended to operate with long lags—although, by the same token, the similarly long lags in the effects of credit conditions would suggest that high real interest rates and slow growth of credit are likely to have had a limited impact on investment activity to date, especially given enterprises’ greater recourse to self-financing. Surveys indicate a continued cautious attitude on the part of firms.

Construction investment declined by 4.2 percent. This was due mainly to the public works component (accounting for more than 50 percent of the total), which has been weak for some time because of delays related to the shift of responsibilities from the Cassa per il Mezzogiorno to the government and the drop of investment by local authorities as well as the continued effect of corruption scandals. There was also little sign of recovery in the residential component, which may have been due to fall of housing prices as well as the increased supply of rental apartments following the abolition of rent control.

In the first three quarters of 1994, inventories made a large positive contribution to growth (0.6 percent), in contrast to their large negative contribution in 1993 (-1.6 percent). In the same period, stocks of finished goods in manufacturing fell below their normal level for the first time since mid-1990.

National savings are estimated to have increased in 1994. This reflects both the recovery of private savings after their decline in 1993 and slightly lower public dissaving as a result of fiscal adjustment. The ratio of gross investment to GDP is expected to have remained at around the 1993 level, as the expansion of private investment (including inventories) was compensated by the contraction of public works. Correspondingly, the external current account surplus widened to an estimated 1 1/2 percent of GDP.

b. Supply

In 1994, the recovery was clearly dominated by the industrial sector and specifically manufacturing production, which grew by 5.3 percent in the first three quarters of 1994; at the same time, the output of the energy sector increased by 0.9 percent, and construction output dropped by 4.5 percent. The performance of the service sector was mixed, with market services increasing by 2.2 percent and nonmarket services dropping by 0.3 percent. Output in agriculture was unchanged from the same period of 1993.

Within manufacturing, industrial production rose by 2.7 percent in the year to the third quarter. Export-oriented sectors grew faster than domestic sectors. Although there has been no clear evidence of bottlenecks so far, these could soon arise in export-oriented sectors, where capacity utilization rates appear to have increased rapidly. 1/

Regional data show that North-Western and Southern regions were those most affected by the 1993 recession; the recovery was concentrated in the export-intensive North-Central region. Given the small number of export-oriented industries in the South, the export-led pattern of the recovery—at least in its initial stages—has exacerbated Italy’s traditional regional duality.

c. Prices

Italian inflation performance has been extraordinarily favorable in view of a nominal effective depreciation of the lira of close to 30 percent since the September 1992 ERM crisis. Cost-of-living inflation reached a 25-year low of 3.9 percent on average for 1994, down from 5.3 percent in 1992. This was largely the result of the sharp deceleration of wages in the context of a widespread adherence to the July 1993 framework agreement, which—accompanied by impressive productivity gains—lead to a decline in unit labor costs, compensating for increases in nonlabor input costs and profit margins. 2/

For 1995, the government set a target of 2.5 percent inflation. This has recently been recognized to be beyond reach, in view of the latest trends in consumer and producer prices, the pickup in inflation expectations, the recent increase in indirect taxes and the persistent weakness of the exchange rate.

Inflation developments and prospects are discussed in more detail in Annex I.

2. Labor market developments

Employment continued falling through 1994, on a seasonally adjusted basis, despite the recovery. This was the case in both the Center-North and the South. Nevertheless, there are signs of recovery of employment in the industrial sector. Surveys of large industrial firms show increases in employment and in the use of overtime. The estimated number of workers on temporary layoff, covered by the wage supplementation fund, is also declining.

Two structural features are expected to begin to play an important role in the near future: (a) the ongoing structural reorganization of public industry, concentrated in the South, and of the retail and transportation sectors; and (b) the flexibility of the labor market, which increased over the last decade and should have an effect as recovery proceeds.

The divergence between employment patterns in the North and South may widen in the years ahead, as a result of demographic trends. While the total working age population in Italy as a whole is projected to be stable or falling, it is projected to fall in the North and rise in the South. 3/ The new framework for wage bargaining agreed upon in July 1993 will allow for an increase of wage differentiation through second tier negotiations at the firm level, which are to start at the end of 1995. This process would, however, take time to differentiate salaries sufficiently across regions to the attenuate regional unemployment. Unemployment prospects are analyzed in more detail in Annex II.

In July 1994, the government introduced some measures aimed at creating incentives for employment, targeted at disadvantaged groups in the labor market; there is little evidence of whether these have had a significant effect on employment so far. A draft law to facilitate temporary and part-time employment was prepared in August, but remains to be discussed by Parliament; it is thought that it could have a relatively important affect.

ANNEX I: Inflation Experience and Prospects 4/

1. Inflation performance since the ERM crisis

Cost of living inflation fell from 5.3 percent in August 1992, just prior to the lira’s exit from the ERM, to a 25-year low of 3.6 percent in July 1994, even while the lira depreciated in nominal effective terms by almost 30 percent. This inflation performance was largely due to the sharp deceleration of unit labor costs, brought about by the recession and a remarkable wage moderation. 5/ The inflationary impact of the depreciation was also attenuated by the pricing behavior of foreign suppliers, who lowered profit margins to maintain market shares in the presence of an unprecedented fall in domestic demand.

a. Wages and labor costs

Nominal contractual wage growth remained well below cost of living inflation since 1992 and fell to about 2 percent in 1994 (Chart 1). Such moderate growth was the result both of the recession and of a marked shift in wage setting behavior. A persistent output gap led to record layoffs and put downward pressure on wages. Two agreements—in 1992 and 1993—between government, industry, and unions abolished wage indexation and linked wage increases to targeted inflation and sectoral productivity gains. Incomes policy contributed to breaking the previously strong link between wages in manufacturing and the rest of the economy: the latter, which were also affected by budget cuts and restructuring in the services sector, increased noticeably less than the former which were boosted by the lira’s depreciation (Chart 1).

CHART 1
CHART 1

ITALY: Wages and Inflation

(Year-on-year percentage change)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: Bank of Italy.1/ Average monthly contractual wage per dependent worker.2/ Compensation of employees = contractual wages plus wage increases at firm level and overtime compensation, including taxes and social security contributions paid by the employee.

Labor productivity growth accelerated from 1991 onward, largely as a result of an unprecedented drop in employment (see Annex II on unemployment). Although the largest gains took place in the manufacturing sector, labor productivity also increased in nontradable sectors such as market services (Chart 2, middle panel). The combined effect of wage moderation and productivity increases brought about a rapid deceleration of unit labor costs (Chart 2, bottom panel).

CHART 2
CHART 2

ITALY: Wages, Productivity and Unit Labor Cost

(Year-on-year percentage change)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: ISTAT.1/ Includes social security contributions paid by the employee.

To maintain market shares in Italy during a European-wide recession, foreign suppliers of manufactured goods reduced profit margins and increased import prices in lire by less than the exchange rate depreciation. “Pricing to market behavior” reduced the initial inflationary impact of the depreciation, but, by October 1994, foreign input prices in manufacturing had increased by the full amount of the lira depreciation (Chart 3). The impact on nonlabor input costs was significant, but largely offset by declining unit labor costs. In the end, the growth of unit variable costs slowed down to zero or even negative figures in both tradable and nontradable sectors (Chart 4).

CHART 3
CHART 3

ITALY: Import Prices and Exchange Rate

(August 92 = 100)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: Bank of Italy.
CHART 4
CHART 4

ITALY: Costs and Prices

(Year-on-year percentage change)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: ISTAT; and Bank of Italy.
b. Profit margins and prices

Profit margins increased in all sectors of the economy since 1992. In the manufacturing sector, cost moderation and higher export prices following the lira depreciation allowed margins to return almost to their 1987 level by the third quarter of 1994 (Chart 5). In the market services sector, the expansion of profit margins began earlier and was larger: unit variable costs dropped more and price inflation remained higher than in the manufacturing sector (Chart 6).

CHART 5
CHART 5

ITALY: Profit Margins - Manufacturing

(Year-on-year percentage change)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Staff estimates based on ISTAT; and Bank of Italy data.
CHART 6
CHART 6

ITALY: Profit Margins - Market Services

(Year-on-year percentage change)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Staff estimates based on ISTAT; and Bank of Italy data

In the early 1990s, CPI inflation declined while the prices of domestic output accelerated, possibly indicating a compression of trade margins due to the restructuring in the distribution sector (Chart 7, top panel).6/ In spite of the different trends, output and CPI inflation were closely related in the short-run, with output prices playing a leading-indicator role, as shown by annualized monthly inflation rates calculated on seasonally adjusted data (Chart 7, bottom panel).

CHART 7

ITALY: Inflation

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: Bank of Italy.

2. Outlook

In view of the latest trends, continued exchange rate weakness, and the recent increase in indirect taxes, the 2.5 percent target for average inflation in 1995 is recognized to be beyond reach. The main source of inflationary pressure remains the continuously depreciating exchange rate, which reached record lows against the deutsche mark in early March 1995. The most recent inflation figures and indicators of expectations show evidence of inflationary pressures, and underlie the Bank of Italy’s decision to raise official rates in late February 1995. Cost of living inflation accelerated to 4.3 percent in February 1995, and both output price and CPI monthly inflation figures show a strong acceleration in the second half of 1994 (Chart 6). In the December monthly survey of manufacturing firms, the percentage of those likely to increase prices over the following three to four months exceeded the percentage of those likely to reduce them by 44 points against a difference of 29 points in November; the revisions were particularly strong in the intermediate and consumption goods sectors (Chart 8). Large increases also characterized CPI inflation a year ahead, as reported in the December quarterly survey, as well as medium-term inflation expectations implicit in forward interest rate differentials.

CHART 8
CHART 8

ITALY: Survey of Price Expectations 1/

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: Isco-Mondo Economico, December 1994.1/ Difference between the percentage of Firms that would increase prices over the following 3 to 4 months and the percentage of Firms that would reduce them.

In 1995, wage growth is likely to remain moderate (all contract renewals have been in line with the targeted 2.5 percent inflation, and no further contracts are up for renewal) and further productivity gains are expected. However, the resulting decline in unit labor costs risks being more than offset, at the current level of the exchange rate, by increasing costs of nonlabor inputs and growing profit margins. Given the worldwide recovery, importers might likely increase their prices in lire to compensate past reductions in profit margins and the recent growth of raw material prices in dollar terms. As a result, the cost of nonlabor inputs could rise and the pressure of foreign competitors on the pricing behavior of domestic producers diminish. In addition, bottlenecks in the most export-oriented sectors may soon arise.

Additional risks for the medium-term outlook could come from possible difficulties on the incomes policy front, if actual inflation in 1995 turned out to be substantially in excess of the 2.5 percent inflation target on which all wage contracts were based. As the economy recovers and the output gap shrinks, wage demands may well increase. Within the framework of the July 1993 wage agreement, second-tier negotiations at the firm level are scheduled to begin toward end-1995 and a second round of national contracts will start in 1996.

ANNEX II: Unemployment 7/

The 1992-94 recession had a much stronger impact on employment and real wages than the recessions of the 1970s and the 1980s. The drop in employment was unprecedented, and was particularly surprising in light of the limited length and depth of the downturn. In addition, for the first time, real wages stopped growing (Chart 9). Two main factors account for these deviations from past behavior. First, in contrast to previous recessions, employment fell in the service sector as well as in the rest of the economy. Second, employment and real wages became more responsive to the cycle as a result of labor market reform.

CHART 9
CHART 9

ITALY: Cycle, Employment and Real Wages

(Year-on-year percentage change)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: ISTAT.

The outlook for employment is uncertain. If the increased sensitivity of employment to output observed in the downturn were confirmed in the upswing, employment could rebound rapidly as the recovery gathers pace. However, reforms to increase the flexibility of the labor market have not yet been completed, and most were introduced in a piecemeal fashion. As a result, the lack of a credible comprehensive plan and the risk of backtracking could make firms more cautious in expanding employment during the upturn.

1. The 1992-94 recession

During the last recession, about a million and a half jobs were lost, twice the number created during the boom of the 1980s (Chart 10, top panel). Unlike in the 1980-83 recession, employment fell not only in the Center-North, but also—and very markedly so—in the South (Chart 10, middle and bottom panels). In a similar pattern, the labor force shrank (Chart 11), although not enough to compensate the employment reduction. As a result, the unemployment rate increased from less than 9 to about 12 percent, reaching 8 percent in the Center-North and 20 percent in the South (Chart 12).

CHART 10
CHART 10

ITALY: Employment

(s.a; thousands of people)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: Bank of Italy.
CHART 11
CHART 11

ITALY: Labor Force

(s.a.; thousands of people)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: Bank of Italy.
CHART 12
CHART 12

ITALY: Unemployment Rate

(s.a.; percentage)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: Bank of italy.

Econometric analysis confirms that labor market behavior during the last recession was radically different from that observed in the past. An econometric model of the Italian labor market was estimated for the period 1977-91 and then simulated up to 1994; simulated values are compared with actual in Charts 13 and 14. 8/ The differences are striking: simulated employment declines slightly until mid-1994 and recovers afterwards; the unemployment rate increases in 1992-93, but then falls in 1994; the labor force diminishes less than in reality and real wages remain marginally higher. This structural break in the econometric relationships is apparently attributable to the employment crisis in the service sector and to the effects of transition from a highly rigid to a more flexible labor market.

CHART 13
CHART 13

ITALY: Employment and Unemployment

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Italian authorities and Fund staff estimates.
CHART 14
CHART 14

ITALY: Labor Force and Real Wages

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Italian authorities and Fund staff estimates.
a. The employment crisis in the service sector

In contrast to previous recessions, the number of service sector jobs declined together with those in the industrial sector (Chart 15b). Two factors account for the reversal, at the beginning of the 1990s, of the trend of growing employment in services. First, the public finance situation did not allow the public administration to act as “employer of last resort” of the economy, as in the past (Chart 16, bottom panel). Secondly, restructuring was under way in the market services sector (Chart 16, top panel). Within the latter, the largest reductions took place in the transportation sector, characterized by a large weight of public enterprises; and in the trade sector, marked by a significant process of restructuring and concentration in distribution with a declining number of small enterprises and a rising share of sales accounted for by large stores (Chart 17). This process of concentration in the trade sector was also the main factor responsible for the unprecedented drop in the number of self-employed during the recession (Chart 18).

CHART 15a
CHART 15a

ITALY: Employment

(Thousands)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Bank of Italy; and ISTAT.
CHART 15b
CHART 15b

ITALY: Employment

(Thousands)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Bank of Italy; and ISTAT.
CHART 16
CHART 16

ITALY: Services

(s.a.; thousands of people)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Bank of Italy; and ISTAT.
CHART 17
CHART 17

ITALY: Market Services

(s.a.; thousands of people)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Bank of Italy; and ISTAT.
CHART 18
CHART 18

ITALY: Dependent and Automonous Employment Trends

(standard unit of labor)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: ISTAT.
b. The transition to a more flexible labor market

Although significant restrictions and distortions remain in the Italian labor market, far reaching changes have been introduced in recent years. New instruments of redundancy reduced firing costs; less-restrictive employment protection legislation reduced hiring costs; the abolition of wage indexation and a new wage bargaining system reduced wage rigidity. 9/

Until 1991, firms facing a reduction in activity or restructuring could lay off workers temporarily, taking advantage of the wage supplementation fund. In 1991, a new law (223/1991) introduced the mobility procedure, which allowed firms to formally terminate the employment relationship. As a result, fewer hours of wage supplementation fund were requested and authorized in this recession than in the 1980-83 one (Chart 19), while firms took advantage of the mobility procedure to reduce the number of workers and the overmanning stemming from years of firing restrictions. 10/

CHART 19
CHART 19

ITALY: Wage Supplementation Fund (CIG)

(In millions of manhours)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: INPS (1993); and Cuchiarelli & Tronti (1993).(*) Estimate based on data for the first ten months.

The reduced use of the wage supplementation fund was not the only sign of increased elasticity of employment to output. Data for large firms indicate that in the most recent recession any evidence of labor hoarding disappeared: the crisis was marked not only by a fall of the hiring rate, as in past recessions (especially in the 1970s), but also by a very large increase of the exit rate. Similarly, during the last recession, the fraction of the unemployed with a previous job increased relative to the share of first-job seekers.

Entering—not only exiting—employment became easier in the second half of the 1980s and early 1990s, as the power of “insiders” diminished. In 1993, the share of young people unemployed was smaller than it was in the early 1980s—in relation to both total unemployment and the demographic age group. Fiscal incentives provided for trainee contracts (1984), as well as increased wage differentiation following the abolition of wage indexation (1992), account for this progress. Nevertheless, in 1993 the share of young unemployed was far the largest among the G7 countries.

Another important element of labor market reform in the early 1990s was increased wage flexibility following the elimination of wage indexation in 1992 and the agreement on a framework for collective bargaining in 1993. For 1993-95, wage increases are tied to officially targeted inflation. This agreement has been adhered to all national contracts concluded so far; as a result, real wages declined as actual inflation turned out to be above the target. Beginning at the end of 1995, the collective bargaining agreement envisions two levels of collective bargaining: a national industry-wide agreement would revise minimum contractual wages every two years with reference to targeted inflation rates; then bargaining at the firm or regional level would determine specific wage increases linked to productivity and profitability developments.

2. Outlook

To identify possible signs of recovery in the labor market, recent trends of employment, real value added and real wages are broken down by sector. Chart 20 considers separately agriculture, industry, market services and nonmarket services. With the exception of the market services sector, there is a strong correlation between employment (measured in standard units of labor) and real value added growth. In addition, since the latter systematically exceeded the former, the charts reflect large productivity gains in all sectors, while real labor costs declined or stabilized.

CHART 20
CHART 20

ITALY: Agriculture, Industry, Services

(Year-on year percentage change)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: ISTAT.

By the third quarter of 1994, the recovery had slowed down the decline of employment. Chart 21 presents the behavior of the same variables in three industry sub-sectors: energy, manufacturing and construction. In the energy and manufacturing sectors, employment was still declining but at lower rates; instead, in the construction sector, severely hit by the contraction of public works, employment and real value added showed no sign of recovery. This evidence should be interpreted with caution: since employment is measured in standard units of labor, an increase does not necessarily imply a larger number of people employed, but could simply correspond to an increase in overtime—which constantly increased in large firms since the beginning of 1994—or to a reduction in the number of people benefitting from the wage supplementation fund (who are treated statistically as employed).

CHART 21
CHART 21

ITALY: Industry (sub-sectors)

(Year-on-year percentage change)

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Source: ISTAT.

To assess the employment outlook, the labor market model presented in Charts 13 and 14 has been re-estimated using all data available until the end of 1994, and simulated up to 1999 using the last World Economic Outlook (WEO) projections for the exogenous variables (Charts 22 and 23). The longer estimation period makes it possible to take into account the higher elasticity of employment to output that characterizes the most recent observations. If a structural break took place in the early 1990s, the actual elasticity should be estimated only using the most recent observations—but those are unfortunately insufficient for estimation purposes. As a result, the new estimated elasticity—though higher than the one estimated with data until 1991—is still likely to be lower than the actual one, since old observations are still taken into account. The simulations predict that employment would bottom out in 1995-96 and increase in later years. Similarly, unemployment would stabilize around its end-1994 level for the next two years and then fall, while the labor force would gradually rebound. Real wages would decline until 1997 and recover thereafter.

CHART 22
CHART 22

ITALY: Employment and Unemployment

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Italian authorities and Fund staff estimates.
CHART 23
CHART 23

ITALY: Labor Force and Real Wages

Citation: IMF Staff Country Reports 1995, 036; 10.5089/9781451819687.002.A002

Sources: Italian authorities and Fund staff estimates.

Projections for the WEO are more optimistic than the above simulations, with the unemployment rate falling by 2000 to the NAIRU 11/ in line with a closing output gap. This projection requires that the recovery phase would be characterized by the higher elasticity of employment to output observed during the latest recession. The strong recovery of employment implied by this projections would require credible prospects for labor market reform with immediate reassuring signals, such as rapid approval of recent proposals to facilitate temporary and part-time employment and greater wage differentiation introduced through second-tier negotiations at the firm level.

1/

As mentioned, capacity utilization rates are still below the pre-crisis levels in all sectors, but available statistics should be interpreted with caution, as they are likely to overlook the effect of the tremendous drop of net investment in 1993 (about 30 percent) and thus to overestimate capacity.

2/

The agreement on the cost of labor is described in Italy - Background Developments and Issues (SM/94/39, 2/11/94).

3/

An additional problem is created by the recent EC guidelines, which mandate a removal of employment subsidies—particularly in the form of subsidization of social contributions (“fiscalizzazione oneri sociali”)—in the South over a three-year period. The removal of these subsidies may lead to a 20-25 percent increase of labor costs in the region. However, EC funds for less developed regions may compensate for this.

4/

Prepared by Alessandro Prati.

5/

A counterfactual simulation of the Bank of Italy quarterly econometric model shows that, in the absence of the depreciation, the 1993 deflator of private consumption would have grown by less than 1 percent as opposed to the actual 4.7 percent.

6/

The data should be interpreted with caution since the two indices do not refer to the prices of the same basket of goods. The basket of goods of the CPI is larger than the one of the cost-of-living index, but the former is available only with a lag.

7/

Prepared by Charis Christofides and Alessandro Prati.

8/

The actual variables do not correspond to those plotted in the previous charts, since employment and unemployment are corrected for an estimate of the number of people on wage supplementation fund, not included in the official unemployment statistics.

9/

A critical presentation of Italian labor market institutions can be found in Chapter 5 of Italy - Background Developments and Issues, (SM/94/39, 2/11/94).

10/

In light of the theoretically “temporary” nature of the layoff, workers on the wage supplementation fund are not considered unemployed and not classified as such in the labor force surveys.

11/

In 2000, the NAIRU is projected to be 9.2 percent, equivalent to about 10.7 percent in the definition used for the simulations, which includes workers on wage supplementation fund among the unemployed.

Italy: Background Economic Developments and Issues
Author: International Monetary Fund