Wage Equalization and Regional Misallocation: Evidence from Italian and German Provinces

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 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. 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.

Local Labor Markets with Non-Homothetic Preferences

“…Germany is a significant setting. Unlike other Continental Europe countries, the specific bargaining structure allow nominal wages in Germany to be more dependent on local labor market conditions (Boeri et al (2021)) and this chimes well with the main mechanism of our model. Moreover, in recent years it experienced a boom in the real estate market (a more than 50 % cumulative growth in residential property prices form 2015 to 2022) 7 and robust growth in nominal earnings (2 -3 % average annual change from 2008 to 2019).…”

Accounting for the duality of the Italian economy

“…Second, our paper is close to an extensive literature that has built regional models of growth and development for the South of Italy, which started with the classic work by Chenery (1962). Finally, our work stresses the importance of heterogeneity in regional productivity, which has recently been studied by Boeri et al (2021) in connection with wage policies in Italy and Germany.…”

Skill demand and labour market concentration: evidence from Italian vacancies

“…8. On the wage rigidity in Italy, see for example (Belloc et al, 2019;Boeri et al, 2021). In France, which has a similar framework to Italy, Bassanini et al (2020) and Marinescu et al (2021) found a limited effect of concentration on wages, while a strong effect on the number of hirings, supporting our idea that in a labour market characterized by high wage rigidity, the employers intervene more through their labour demand rather than their wages.…”

“…8. On the wage rigidity in Italy, see for example (Belloc et al ., 2019; Boeri et al ., 2021). In France, which has a similar framework to Italy, Bassanini et al .…”