Working Paper: CEPR ID: DP13545
Authors: Andrea Ichino; Tito Boeri; Enrico Moretti; Johanna Posch
Abstract: Italy and Germany have similar geographical differences in firm productivity—with the North more productive than the South in Italy and the West more productive than the East in Germany—-but have adopted different models of wage bargaining. Italy sets wages based on nationwide contracts that allow for limited local wage adjustments, while Germany has moved toward a more flexible system that allows for local bargaining. We find that Italy exhibits limited geographical wage differences in nominal terms and almost no relationship between local productivity and local nominal wages, while Germany has larger geographic wage differences and a tighter link between local wages and local productivity. As a consequence, in Italy, low productivity provinces have higher non-employment rates than high productivity provinces, because employers cannot lower wages, while in Germany the relationship between non-employment and productivity is significantly weaker. We conclude that the Italan system has significant costs in terms of forgone aggregate earnings and employment because it generates a spatial equilibrium where workers queue for jobs in the South and remain unemployed while waiting. If Italy adopted the German system, aggregate employment and earnings would increase by 11.04% and 7.45%, respectively. Our findings are relevant for other European countries.
Keywords: No keywords provided
JEL Codes: J3; J5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| if Italy adopted German system (F55) | aggregate employment increases (E10) |
| if Italy adopted German system (F55) | aggregate earnings increase (C43) |
| wage rigidity (J31) | inefficiencies of the current Italian wage setting system (J39) |
| Italian wage bargaining system (J52) | limited geographical wage differences (J31) |
| limited geographical wage differences (J31) | weak relationship between local productivity and nominal wages (J39) |
| wage rigidity (J31) | higher nonemployment rates in low productivity provinces (J68) |
| low productivity (O49) | higher nonemployment rates in Italy (J69) |
| German wage flexibility (J39) | weaker relationship between productivity and nonemployment (J29) |