Working Paper: NBER ID: w25612
Authors: Tito Boeri; Andrea Ichino; Enrico Moretti; Johanna Posch
Abstract: Italy and Germany have similar geographical differences in productivity – North more productive than South in Italy; West more productive than 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. The Italian 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. Our findings are relevant for other European countries.
Keywords: Wage Bargaining; Regional Misallocation; Labor Market Inequality; Italy; Germany
JEL Codes: J01; R1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wage rigidity in Italy (J39) | Higher nonemployment rates in low productivity provinces (J69) |
| Wage flexibility in Germany (J39) | Better adjustment to local productivity (F16) |
| Centralized wage bargaining system in Italy (J52) | Workers queue for jobs in low productivity southern regions (J68) |
| Workers queue for jobs in low productivity southern regions (J68) | Higher nonemployment rates (J69) |
| Nominal wage equalization in Italy (F16) | Lower employment and earnings in low productivity areas (J69) |
| Local productivity (O49) | Nonemployment rates (J69) |
| Local productivity (O49) | Local wages (J31) |
| If Italy adopted a more flexible wage bargaining system (E69) | Average wages in southern provinces would decrease (F66) |
| If Italy adopted a more flexible wage bargaining system (E69) | Employment would increase significantly (J23) |
| If Italy adopted a more flexible wage bargaining system (E69) | Aggregate earnings would enhance (C43) |