Inside the Black Box: Labour Market Institutions, Wage Formation and Unemployment in Italy

Abstract

This study provides an assessment of the features that, operating inside the black box, shapes the evolution of the Italian economy. In the first section the focus is placed on the functioning of the labour market at the aggregate level. The picture described suggests that the Italian labour market is characterized by high employment rates for adult males and both low participation and low employment rates for other groups of individuals (such as young, old and females) and by a large share of long-term unemployment. The rise in unemployment and its persistently high level have been blamed, both in Italy and in other European countries, on imperfections and rigidities originating mainly in the labour market. In this case, both strong employment protection regulation and rigid system of wage determination appear to have played a major role in Italy. In particular, the existence of high wage floor - either set through statutory minimum wages or by collective bargaining - has the effect of segmenting the labour force, increasing job instability and paradoxically increasing the duration of unemployment. An additional dimension of segmentation also characterizes the Italian labour market, notably the 30 percent's unemployment rate in the South (6 percent in the North) and the presence of a large share of the labour force employed in the underground economy. In the last section, we discuss how the decentralisation of bargaining, the introduction of higher labour market flexibility as well as the reform of social security, could reduce insider power in the labour market and eliminate the vicious cycle that tends to displace workers out of the primary sector, thus fueling the irregular economy.