Employment incentives and the disaggregated impact on the economy. The Italian case

Abstract

Over the past two decades, the Italian labour market has undergone a number of profound changes. A thorough analysis of these changes shows that there has been a progressive employment polarisation, although with a very peculiar dynamics. While employment did grow in high-skill and low-skill occupations, and it shrank in the medium-skill ones, these changes did not take place simultaneously, as polarisation assumes. Moreover, wage polarisation is hardly observable in the same period. Quite differently, Italy has been characterised by relatively low or even declining returns to education along with progressively decreasing wages in the low-skill segment of the labour market. In this context, we study the potential of an employment incentive policy, for which we imagine two options, one targeting workers in high-skill and the other in low-skill occupations. The objectives of the policy are enhancing aggregate employment and improving working conditions (wages) either in high-skill or low-skill occupations, depending of the option. For the simulation of the two policy options, we employ an integrated model that combines a macro disaggregated and multi-sectoral Computable General Equilibrium (CGE) model with a micro-simulation model. While the CGE model evaluates how the macroeconomic shock reverberates on the labour demand at industry level, the micro-simulation model computes how the changes in macroeconomic variables affect households’ decisions in terms of labour supply and final consumption.