Free DP Download 28 February 2019: Wage Equalization and Regional Misallocation: Evidence from Italian and German Provinces

Thursday, February 28, 2019

Wage Equalization and Regional Misallocation: Evidence from Italian and German Provinces
Tito Boeri, Andrea Ichino, Enrico Moretti and Johanna Posch 
CEPR DP No. 13545 | 22 February 2019

If Italy were to adopt Germany’s system of local wage bargaining, aggregate employment and earnings would increase by 11.04% and 7.45%, respectively. That is the conclusion of a new CEPR study, which compares the local and aggregate effects of collective bargaining in the two countries.

Italy and Germany have similar geographical differences in firm productivity – with the North more productive than the South in the former; and the West more productive than the East in the latter. But the two countries 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 new research finds that, as a consequence, Italy exhibits limited geographical wage differences in nominal terms and almost no relationship between local productivity and local nominal wages, while Germany has larger geographical wage differences and a tighter link between local wages and local productivity.

While the Italian system is successful at reducing nominal wage inequality, it also creates costly geographical imbalances. In Italy, low productivity provinces have significantly 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.

In Italy, the relationship between real wages and productivity is negative, with lower real wages in the North compared with the South, since the latter has low housing costs but similar nominal wages. Thus, conditional on having a job, Italian workers have higher purchasing power in the South, but the probability of having a job is higher in the North.

The researchers conclude that the Italian system has significant costs in terms of forgone aggregate earnings and employment because it generates a situation where workers queue for jobs in the South and remain unemployed while waiting. The findings are relevant for several other European countries with systems similar to Italy's.

Download for free

About CEPR Discussion Papers
Research by CEPR Research Fellows and Affiliates appears initially in the CEPR Discussion Paper series. These Discussion Papers are circulated widely to other specialists in the research and policy community so that the results of the research receive prompt and thorough professional scrutiny. The Centre produces more than 800 Discussion Papers each year and has an archive of over 13,000 of them. Find out more here.