The Selected Issues paper provides an estimate of the output gap and potential output for Italy, and examines the sensitivity of the results to assumptions regarding employment and productivity growth. The paper focuses on the labor market more directly by examining the linkages between wage bargaining systems, regional wage differentiation, and regional unemployment disparities. It also provides an assessment of the government’s tax reform program, including its potential to increase incentives for employment and investment.

Abstract

The Selected Issues paper provides an estimate of the output gap and potential output for Italy, and examines the sensitivity of the results to assumptions regarding employment and productivity growth. The paper focuses on the labor market more directly by examining the linkages between wage bargaining systems, regional wage differentiation, and regional unemployment disparities. It also provides an assessment of the government’s tax reform program, including its potential to increase incentives for employment and investment.

III. Regional Wage Differentiation and Wage Bargaining Systems: The Case of Italy28

A. Introduction

40. The theoretical literature on the impact of the wage bargaining system on wage differentiation is extensive, but only few empirical studies exist, especially for the effects on regional wage differentiation. The consensus is that a centralized wage bargaining system, although it may help a low inflation policy, will be dominated either by the leading region or the medium region (in terms of productivity), causing low regional wage differentiation and high regional unemployment differentials (see literature review below). However, though the theoretical predictions are clear, empirical evidence is scant, with analysis hampered by data limitations at the regional level.

41. This issue is of particular importance for Italy. Italy has the highest regional unemployment differentiation in the EU but one of the lowest regional wage differentials. Unemployment in the South is almost four times higher than in the North, and while productivity in the South is estimated to be only 80 percent of that in the North, wages are about 90 percent.29 Taking into account that the cost of living seems to be lower in the South, real wages in the South may actually be higher than in the North. It has been argued that Italy’s very centralized wage bargaining system is one of the reasons for its low wage differentiation across regions, which in part explains its high regional unemployment imbalances.

42. This chapter argues that, indeed, centralized wage bargaining systems and low regional wage differentiation are often linked. Empirical evidence for the euro area suggests that countries with less centralized wage bargaining systems have higher regional wage differentials after controlling for regional productivity differentials and other wage determinants. Although the wage bargaining system explains only partly regional wage differences, the empirical evidence suggests that a more flexible wage bargaining system in Italy could increase regional wage differentiation.

43. The chapter uses the OECD (1997) index of coordination in wage bargaining to determine the centralization of the wage bargaining system in euro-area countries. A wage bargaining system is characterized as centralized if wages are determined primarily at the national level and decentralized if wages are determined primarily at the firm level. National level bargaining does not necessarily result in one uniform wage, since it often includes negotiations for wages by sector, or by region. A wage bargaining system is characterized as coordinated if wage negotiations between unions, employers, and the government are coordinated, either through national bargaining, or through other formal or informal mechanisms when wage negotiations are taking place at the sectoral, regional, or firm level. Even if a wage bargaining system is not characterized as centralized by the OECD indices, high coordination between unions, employers’ organizations, and the government during decentralized negotiations produces the same outcome as in a system of wage bargaining at the national level. To take into account such cases, the degree of coordination is chosen as an indicator of the centralization of the wage bargaining system.

44. The chapter proceeds as follows: Section B discusses the Italian labor market, its characteristics and institutions, its regional disparities, and the wage determination process in Italy; Section C discusses the literature on the links between the wage bargaining system and regional wage differentiation and presents empirical evidence that, in the euro area, countries with less centralized wage bargaining systems have higher regional wage differentials after controlling for productivity differentials and other wage determinants; and Section D concludes, summarizing the main results and implications.

B. The Case of Italy

The Italian Labor market

45. Italy’s labor market performance lags behind other euro-area countries. Italy has the third highest unemployment rate in the euro area, the highest share of long–term unemployment, and the lowest participation rate (Tables 1 and 2). The employment protection legislation (EPL) in Italy is measured to be more strict than the euro–area average, despite reforms in the second half of the 1990s, and considerably more strict than in the United Kingdom and the United States, in particular for dismissals.

Table 1.

Labor Market Characteristics in Italy and Other Selected Economies, 1998 1/

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Sources: OECD, Labour Market Statistics (2001); Eurostat (2002); and IMF. WEO (2002).

Data are for 1998, except where indicated otherwise.

Excluding Luxembourg.

The rank decreases as the value of each variable increases. For example, Italy has the lowest labor force participation rate in the Euro area and is ranked as eleventh, while it has the highest coefficient of variation of regional unemployment rates and is ranked as first.

2000

1999

Table 2.

Unemployment and Participation Rates in Selected OECD Countries: 1980–2001

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Source: OECD, Labor Market Statistics, 2001.

Data for the labor participation rate in the United States are for 1999.

46. However, Italy’s labor market performance differs sharply across regions (Table 3). The South has two-thirds of the unemployed and a 50 percent youth unemployment rate. The unemployment rate is about 20 percent in the South, while it is less than 5 percent in some regions of the North. The coefficient of variation of regional unemployment rates in Italy is the highest in the EU (Table 4). Moreover, regional unemployment disparities in Italy increased during the last two decades (Figures 1 and 2). According to a variance decomposition exercise for regional unemployment in OECD (2000), more than 70 percent of the explained regional variance of unemployment in Italy is due to region–specific factors, other than regional differences in education, gender, and age.30 Although the regional mix of industries may contribute to this result, the study finds a very low correlation between regional unemployment rates and the proportions of employment in agriculture, manufacturing, and services in OECD countries.

Table 3.

Regional Unemployment Rates, 1983–2000

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Sources: Eurostat
Table 4.

EU, Unemployment Rate

(Regional Coefficient of Variation)

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Sources: Eurostat.
Figure 1.
Figure 1.

Regional Unemployment Rates, 1983–20001

Citation: IMF Staff Country Reports 2002, 232; 10.5089/9781451819830.002.A003

Source: Regional Statistics, Eurostat.1/ The South excludes the islands.
Figure 2.
Figure 2.

Regional Coefficient of Variation for Unemployment Rates, 1983–2000

Citation: IMF Staff Country Reports 2002, 232; 10.5089/9781451819830.002.A003

Source: Regional Statistics, Eurostat.

47. The large differences in regional unemployment rates in Italy could be the result of regional shocks, or/and regional employment and unemployment responding asymmetrically to common aggregate shocks. For example, the South experienced a reduction in government employment and, following findings of abuse of public funds, a drop in construction activity in the 1990s.31 Bayoumi and Prasad (1997) found industry–specific shocks to be more important than aggregate shocks for explaining disaggregated output growth fluctuations in Italy. Brunello, Lupi, and Ordine (2001), following Blanchard and Katz (1992) and Jimeno and Bentolila (1998), found similar evidence regressing the employment growth of each Italian region on the employment growth of the rest of the country for the period 1965–94. The authors took a low R2 in the southern regions as evidence that idiosyncratic shocks were relatively more important than aggregate country shocks in the South. Replication of their methodology for the period 1983–2000 confirms that the R2 in the South is lower than in North, although this is not the case for some of the large regions, including Sicilia and Sardegna (Table 5). Still, the estimates show a very large variation of regional responsiveness to aggregate shocks across regions.

Table 5.

Responsiveness of Regional Employment to Aggregated Shocks: Regressing Regional Employment Growth on Employment Growth in the Rest of Italy

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48. Regional wages in Italy do not seem to reflect regional labor market conditions. Italy has one of the lowest coefficients of variation for regional wages in the euro area, indicating an inability of wages in the high unemployment regions to decline in relative terms (Table 6). The regional coefficient of variation of wages declined during the 1990s up until 1997, while wages in the South as a percent of wages in the North remained broadly constant at more than 90 percent (Figure 3 and 4; and Table 7). This implies that although the relative wages of the North and South did not change during this period, wage variation within the North and South declined. The inability of wages in the high unemployment regions in Italy to decline in relative terms is one of the factors limiting migration to the low unemployment regions—Italy has the lowest internal migration share in the OECD (according to the most recently available data), notwithstanding an increase in migration flows in recent years. Moreover, the lack, or at least inadequacy of a wage adjustment mechanism at the regional level in Italy implies that temporary regional shocks may have permanent effects on regional unemployment.

Table 6.

Compensation Per Employee and Gross Internal Migration in Selected OECD Countries

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Sources: Eurostat and OECD.
Table 7.

Gross Nominal Wages in the South Over Total Labor Force, Italy = 100

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Sources: ISTAT and Davies and Hallet (2001).
Figure 3.
Figure 3.

Regional Wage Coefficient of Variation (20 regions), 1983–99

Citation: IMF Staff Country Reports 2002, 232; 10.5089/9781451819830.002.A003

Source: ISTAT.
Figure 4.
Figure 4.

Wages in the South as a percent of wages in the North 1983-99

Citation: IMF Staff Country Reports 2002, 232; 10.5089/9781451819830.002.A003

Source: ISTAT.

49. Micro evidence also show low wage differentiation in Italy. Mauro, Prasad, and Spilimbergo (1999) used the 1995 Bank of Italy’s household survey. After controlling for differences in workers’ level of education, experience, and other characteristics, they found that differentials in hourly wages between the North and the South in Italy was only 12 percent. Using a more recent household survey, Brandolini, Cipollone, and Sestito (2002) found that although the mean real monthly earnings in the South were 15 percent lower than in the North at the end of 1970s, this gap was eliminated by the end of the 1980s. However, they also found that the gap increased during the 1990s, with average wages in the South at 13 percent of average wages in the North, a gap more consistent with what is found in Mauro, Prasad, and Spilimbergo (1999).

50. Regional wage differentials in Italy seem smaller than what a competitive labor market would have produced according to some indicators. Labor productivity in the South is estimated to be about 80 percent of labor productivity in the North (Table 8). It is likely that the differential would have been even higher if the South had a lower unemployment rate, assuming that the ones currently employed in the South are the most productive workers. Although there are no data for regional price level comparisons in Italy, the accumulated difference in prices between North and South in the period 1947–98 is estimated to be 14 percent—a period over which wage differentials narrowed.32 Although this difference declines to 5 percent if an outlier is excluded—Potenza, a relatively small city in the South—a relatively high price gap between South and North must have been already present in the immediate postwar period given the income gap. This implies that real wage differentials between South and North are even smaller than nominal differentials. Based on a labor supply model described in Decressin (2000), higher unemployment by 1 percentage point in Italy should lead to lower wages by 1 percentage point. This implies that the current unemployment gap between North and South in Italy should had led to a wage gap of about 15 percentage points. It has been argued that wages above the equilibrium level in the South have contributed to the growth of the informal economy—one third of total employment in the South is in the informal economy, compared with 20 percent in Italy as a whole.33

Table 8.

Labor Productivity by Region, 1995–99

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Source: Eurostat.

51. Regional wages converged in Italy during the 1970s. Wages in the South increased from about half the level of wages in the North in 1960, to 90 percent by the early 1980s and remain at about this level since then.34 The regional coefficient of variation of wages declined from 19 percent in 1974 to 12 percent by the mid–1980s (Figure 5). Erickson and Ichino (1994) found that the coefficient of variation of wages across industries declined during this period and argued that this was caused by the egalitarian wage–setting institutions in Italy and inflation indexation (see below).

Figure 5.
Figure 5.

Coefficient of Variation, Hourly Wages of Blue Collar Workers, 1975–85

Citation: IMF Staff Country Reports 2002, 232; 10.5089/9781451819830.002.A003

Source: Erickson and Ichino (1995).

52. The compression of regional wage differentials in Italy went hand-in-hand with an increase of regional unemployment differentials. While the unemployment rates in the North and South were almost equal in the mid–1960s, 5.6 percent and 6 percent, respectively, unemployment in the South increased to almost four times higher than that in the North by 2000. 35 Although this does not show causality—that less wage differentiation led to high unemployment disparities—it is consistent with empirical evidence below suggesting that this was indeed the case.

53. Empirical evidence suggests that wages in the South are determined by the labor market conditions of the North. Brunello, Lupi, and Ordine (2001) estimated a wage equation for a panel of regions in Italy for the period 1970–94 and found that the unemployment rate in the North was driving the wage determination process in the whole country. When they estimated a wage equation only for the regions of the South, they found that the unemployment rate in the South did not have a statistically significant impact on wages, while the unemployment rate in the North did. Similar evidence in Brunello, Lupi, and Ordine (2000) show that increases in the southern unemployment rate do not affect aggregate wages.

54. This evidence is confirmed using also more recent Italian data, concerning the period 1983–99. We estimate the following wage equation for five regions in the South (the only southern regions with available data included: Puglia, Basilicata, Calabria, Sicilia, Sardegna):

Δlnwit=c+c1T+c2Δlnuit+c3lnwit-1+c4lnuit-1+c5lnuNt-1+εit(1)

where wit is the wage in region i, T is a linear trend, uit is the unemployment rate in region i, and uNt is the unemployment rate in the North Italy. The estimated equation is the following:

Δlnwit=0.35+0.00T+0.01Δlnuit-0.06lnwit-1+0.02lnuit-1-0.06lnuNt-1+εit(2.91)(-1.10)(0.99)(-1.73)(1.44)(-2.57)(2)

Adj. R2: 0.58

Observations: 85

Heteroskedasticity-consistent t-statistics in parenthesis.

55. The evidence suggests that the wage in the South is significantly affected by the unemployment rate in the North. A high unemployment rate in the North seems to result in a decline of the wage in the South with one period lag. By contrast, the unemployment rate in the South does not have a statistically significant coefficient. 36 This evidence suggests that wage determination in Italy is driven by the labor market conditions in the low unemployment regions, that is, the North.37

The wage determination system in Italy

56. The institutional features of the Italian labor market have been pointed out as a cause of low regional wage differentiation.38 The wage indexation system was modified in 1975 to provide similar cost of living adjustments for all workers. This was followed by a sharp decline of wage differentiation. Although indexation was abolished in 1992, Italy’s centralized wage bargaining system kept regional wage differentials low. Despite some steps in 1993 to make the wage determination system more flexible, the centrally negotiated wage floor accounts for a substantial portion of most wages in Italy (see below).39

57. Italy has a centralized and coordinated wage determination system, with high union density and coverage, compared with other industrial countries (Table 9). The collective bargaining structure in selected OECD economies is assessed based on indices for the level of wage bargaining and the level of coordination among employers and trade unions from OECD (1997). The indices take values from 1 to 3, with 1 for the lowest level of centralization or coordination.40 Italy has a relatively centralized collective bargaining system and a high degree of coordination. Many other European countries have centralized and highly coordinated collective bargaining systems, including Austria, Germany, and Norway.41 Furthermore, unions play a key role in the wage determination process in Italy—although only 39 percent of Italian workers are union members, wage bargaining decisions are very coordinated and result in national contracts that cover 82 percent of Italian workers.

Table 9.

Collective Bargaining Characteristics of Selected OECD Countries

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Source: OECD (1997 and 2001).

58. The bargaining structure in Italy changed in mid-1993 following an agreement between the government and the social partners. Prior to that date, the following features characterized the wage determination process: backward–looking wage indexation linked to the national cost of living (scala mobile), from 1946 to 1992, which from the mid 1970s to the mid-1980s took the form of a flat-amount indexation system irrespective of the actual wage level leading to occupational and regional wage compression; a system from 1961 to 1969 allowing for sectoral wage differentials but limited to a maximum of 20 percent; and the system of national agreements, introduced in 1969, which set national wage floors by sector.42 Some large firms introduced pay incentives schemes in the mid-1980s but without any legislative framework. The 1993 agreement established new rules for collective and firm-level bargaining, after the abolition of the backward wage indexation system in 1992.43 The bargaining system after 1993 still has two levels, but precise definitions determine the issues that can be negotiated at each level and the rules that regulate negotiations on wages. The two levels are now defined as: national bargaining at the sectoral level, which defines normative (in four-year agreements) and economic aspects (in two year agreements); and company bargaining (four-year agreements), which allows for performance-related pay, in addition to what was agreed at the sector-level bargaining.44

59. Sector-level bargaining at the national level is still the most relevant system for the majority of employees in Italy. Income policy and welfare benefits are decided at the national level and apply to all sectors; wage increases are decided at the national/sectoral level; and the wage drift is negotiated at the local level, but primarily in large firms in the North. However, firm-level bargaining, often in the form of wage increments on the basis of corporate performance, covered only an estimated 4 percent of employees in 1994–97.45 Centralized bargaining results in legally binding wage floors by sector and by occupation, which are then applied uniformly across regions.

C. Wage Bargaining System and Regional Wage Differentiation

60. This section focuses on the links between the wage bargaining system and regional wage differentiation. Empirical evidence for the euro area suggests that after controlling for productivity differentials and other wage determinants, countries with less centralized wage bargaining systems (with relatively more firm level wage bargaining taking place) have higher regional wage differentiation. However, the evidence shows that a considerable part of regional wage differentiation in the euro area remains unexplained.

61. The results suggest employment in the South could be increased by adopting a more flexible wage bargaining system. Although the wage bargaining system explains only partly regional wage differences, the evidence suggests that decentralizing wage bargaining (allowing more firm-level bargaining) matters.

Literature review

62. It has been argued that centralization of the wage bargaining process tends to reduce wage dispersion. In a centralized wage bargaining system, in which wages are negotiated at the national level, unions may tend to favor the median voter. Uncertainty about wages after the negotiating process could result in the compression of wage differentials by unions. Pench, Sestito, and Frontini (1999) present a model with some empirical evidence for EU countries suggesting that in countries with centralized labor markets and large interregional productivity differentials, decisions are tailored for the median region, resulting in a wage floor consistent with high unemployment in the less productive regions. Furthermore, unions may prefer a solidaristic wage policy, in which average productivity determines wages.46

63. If a country, in addition to a centralized wage bargaining system, has regional economic asymmetries, then it is in the interest of the union members in the more developed regions to have wages above equilibrium in the less developed regions. Saint-Paul (1997) argued that wages in Italy and Germany are determined in the leading regions, North in Italy and West in Germany, and that the union members in the leading regions have an incentive to keep wage differentiation low to slow down migration flows.47

64. The parties with decision power in a centralized wage bargaining system may prefer a low regional wage differentiation. Workers and employers in the leading regions do not want higher competition from lower wages in the lagging regions, while the employed in the lagging regions prefer high wages. The groups who would benefit from higher regional wage differentiation include the group of unemployed in the lagging regions, who do not have much of a bargaining power, and the employers in the lagging regions, who although may participate in the decision process they may be less powerful than the employers in the leading regions.

65. In a country with a centralized wage bargaining system and with wages determined by the leading region, low wage dispersion could coexist with high unemployment variation. A negative economic shock will increase unemployment in the lagging region without affecting wages, while the same shock in the leading region will reduce wages. As a result, the impact of a negative shock on employment will be smaller in the leading region and will not last as long as in the lagging region. If local wages were determined by local economic conditions, then temporary asymmetric economic shocks would not cause permanent regional unemployment disparities.48 Some empirical evidence are in support of this argument, showing that in a centralized wage bargaining system, negative shocks have a larger impact on poor regions (see Pench, Sestito, and Frontini, (1999).49

66. The literature on the costs and benefits of various wage bargaining systems has primarily focused on the impact of each system on total unemployment and inflation. Bruno and Sachs (1985) found that centralized wage bargaining systems result in lower unemployment. Calmfors and Driffil (1988), Flanagan, Moene and Wallerstein (1993), and Cukierman and Lippi (1999) found that either centralized or very decentralized (firm level) bargaining systems result in lower unemployment and lower wages—while intermediate systems, with negotiation at the industry level, result in higher unemployment and higher wages. According to this evidence, extremes work better—a centralized bargaining system results in lower wage demands to internalize unemployment externalities, while a decentralized bargaining system results in a similar outcome because of high competition at the firm level. Both factors are absent when negotiations are at the industry level, since industry unions do not internalize the externality of their wage demands to the rest of the economy, and competition is low across different industries. However, this evidence is not robust as OECD (1997) has shown, and the debate is still open.

Wage bargaining centralization and regional wage differentiation in the euro area: empirical results

67. This section provides estimates on the link between the degree of centralization in the wage bargaining system and regional wage differentials in the euro area. As the previous section concluded, theory suggests that a centralized wage bargaining system implies small regional wage differentials. The OECD provides indices for both the level of centralization and coordination of wage bargaining. A wage bargaining system is characterized as centralized or decentralized, depending on the extent that wages are decided at the national level, or at the firm level respectively. National level bargaining does not necessarily result in one uniform wage, since it often includes negotiations for wages by sector, or region. A wage bargaining system is characterized as coordinated if wage negotiations between unions, employers, and the government are coordinated, either through national bargaining, or through other formal or informal mechanisms when wage negotiations are taking place at the sector, regional, or firm level. In the analysis reported below, the degree of coordination is chosen as an indicator of the centralization of the wage bargaining system since even if wages are determined at the firm or sector level, high coordination between unions, employers’ organizations, and the government produces the same outcome as in a system of wage bargaining at the national level (OECD, 1997).

68. The sample includes all euro-area countries (except Greece, Luxembourg, and Ireland) and Sweden. The choice of the countries in the sample is based on data availability in the Regional Statistics of Eurostat, which is the source for all data but the index of coordination of the wage bargaining system, which comes from OECD (1997). The sample is a panel of 10 countries and 126 regions for 1998 (the only year with available regional wage data). The dependent variable is the difference between the wage in a region and the wage in the whole country of this region, measured as the absolute value of 1 minus the ratio of the wage in a region with the national wage (absolute values are taken because the estimation attempts to find the determinants of regional wage differentials regardless if they are positive or negative). The independent variables include: the regional labor productivity differential compared with the labor productivity in the respective country, the regional unemployment differential compared with the unemployment rate in the respective country, the OECD index of coordination of the wage bargaining system in each country (this is the same for each region within the same country), and country size, to control for a possibility that small countries may have small regional differentials.

69. The results suggest that the more coordinated the wage bargaining system in a country the smaller its regional wage dispersion, after controlling for other determinants of regional wage differentiation (Table 10). The first regression includes only the productivity differential and the coordination index. The second and third add the country size and the unemployment differential. The last regression includes country fixed effects instead of the coordination index. The estimates of the coordination index in the first three regressions are negative and statistically significant (although only at the 10 percent level when the unemployment differential is included in the third regression). The country size and the unemployment differential have the expected signs but are not statistically significant. The correlation of the country fixed effects in the last regression with the coordination index is -0.3 (this regression excludes the country size and the unemployment differential since they were not found to be statistically significant), suggesting, with some caution given the small sample, that the more coordinated the wage bargaining system in a country the smaller the regional wage dispersion. However, the relatively low explanatory power of the estimated equation (with an adjusted R2 equal to between 31 and 36 percent) implies that a large part of regional wage differences in the euro area remains unexplained. It is somewhat surprising that the estimate for the productivity differential is smaller than 1. These results should be treated as only suggestive, since the sample of countries is small, with a relatively small variation in their wage bargaining characteristics (most countries in Europe have relatively centralized and coordinated wage bargaining systems). Moreover, the work on wage bargaining indices is still in progress, implying that existing indices may suffer from measurement errors.

Table 10.

Italy: Regional Wage Differentiation and Coordination in Wage Bargaining: Euro Area, 1998

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Note: White Heteroskedasticity-Consistent t-statistics in parenthesis.

70. The results imply that regional wage differentials are likely to increase in Italy if a more decentralized wage bargaining system were adopted. If Italy’s coordination index declines from its current value of 2.5 to the minimum value of the index of 1, regional wage differences will increase by about 5½ percentage points, keeping productivity differences constant. This would bring Italy’s regional wage differentials to a level slightly smaller than the euro–area average, with the remaining difference explained by other wage determinants.

D. Conclusions

71. Even though Italy has very high regional unemployment disparities, it has very low regional wage differentiation. This chapter investigated the empirical relationship between Italy’s very centralized and coordinated wage bargaining system and its low regional wage differentiation.

72. The empirical results suggest that countries with relatively centralized or coordinated wage bargaining systems tend to have smaller regional wage differentials. Although the wage bargaining system explains only part of the regional wage differences, the empirical evidence suggests that a more decentralized wage bargaining system in Italy could increase regional wage differentiation. Strengthening company-level bargaining within the existing two-tier bargaining system could lead to similar results. To further investigate the robustness of these results, it would be useful for future work to increase the country sample, to improve the indices of wage bargaining, and to investigate the role of other determinants of regional wage differentials in addition to the ones pointed out in this chapter.

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28

Prepared by Athanasios Vamvakidis.

29

In this chapter, South refers to the southern regions of Italy, including Sicilia and Sardegna, except if indicated otherwise, while North refers to all other regions (for a list of regions, see Table 5).

30

Pench, Sestito, and Frontini (1999) found that in Germany, Belgium, and Italy unemployment was significantly a regional problem based on a similar exercise.

32

This is an updated estimate of the one in Alesina, Danninger, and Rostagno (1999), which stops in 1995. However, no significant change took place in the period 1995–98.

36

The results are robust to adding regional dummies in the regression, or to 2 SLS estimation (with the lagged change in the regional unemployment rate, the change in the national unemployment rate, and the first lag of a cyclical indicator, obtained as the residual from fitting regional GDP on a quadratic trend, as instruments); see Brunello, Lupi and Ordine (2001).

37

Estimating this equation for the period after the reforms of 1992 results in positive but statistically insignificant estimates for the unemployment rates of the South and the North. Although this is consistent with the often heard argument that wage determination was driven by the government’s income policy during this period, it may be the result of small sample size.

40

The OECD indices stop in 1994, but very few countries have reformed their collective bargaining systems since then.

41

However, Decressin and Decressin (2002) argue that Germany’s wage bargaining system is neither fully centralized nor fully decentralized.

42

See Demekas (1995), Erickson and Ichino (1995), Mauro, Prasad, and Spilimbergo (1999), and Davies and Hallet (2001).

43

See Demekas (1995) and Casadio (2001) for details.

44

The recent Accord for Employment (has not been voted to a law yet) introduces measures that are expected to increase labor market flexibility in Italy but does not address the problem of low wage differentiation. The accord eases some dismissal restrictions, facilitates job matching, strengthens public employment agencies, and promotes job-oriented education, in addition to measures to further liberalize part-time contracts and to increase unemployment benefits.

45

G. Cainelli, R. Fabbri, P. Pini, “II premio di risultato in Emilia Romagna; modalita contratfuali e determinant,” Quademi del Dipartimento di Economia, Istituzioni e Territorio dell’Universita di Ferrara (1999).

47

Although Decressin and Decressin (2002) found no compelling evidence for wage floors that constrain the adjustment of wages of the less well paid in Germany.

49

For similar evidence at the industry level, see Thomas (2002).

Italy: Selected Issues
Author: International Monetary Fund