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Competitiveness and Wage Bargaining Reform in Italy

Alvar Kangur

No 2018/061, IMF Working Papers from International Monetary Fund

Abstract: The growth of Italian exports has lagged that of euro area peers. Against the backdrop of unit labor costs that have risen faster than those in euro area peers, this paper examines whether there is a competitiveness challenge in Italy and evaluates the framework of wage bargaining. Wages are set at the sectoral level and extended nationally. However, they do not respond well to firm-specific productivity, regional disparities, or skill mismatches. Nominally rigid wages have also implied adjustment through lower profits and employment. Wage developments explain about 45 percent of the manufacturing unit labor cost gap with Germany. In a search-and-match DSGE model of the Italian labor market, this paper finds substantial gains from moving from sectoral- to firm-level wage setting of at least 3.5 percentage points lower unemployment (or higher employment) rate and a notable improvement in Italy’s competitiveness over the medium term.

Keywords: Competition; Wage bargaining; Exports; Exchange rates; Labor costs; Labor market reforms; Fiscal reforms; General equilibrium models; Italy; Total factor productivity; National accounts; Economic conditions; Supply and demand; Economic growth; competitiveness,exchange rate,search and matching,DSGE models,Forecasting and Other Model Applications,Quantitative Policy Modeling,Country and Industry Studies of Trade,Trade and Labor Market Interactions,Open Economy Macroeconomics,Trade Unions: Objectives,Structures,and Effects,Unemployment: Models,Duration,Incidence,and Job Search,euro area,TFP,ULC,price-based,export price (search for similar items in EconPapers)
Pages: 38
Date: 2018-03-16
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Handle: RePEc:imf:imfwpa:2018/061