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

Tito Boeri, Andrea Ichino, Enrico Moretti, Johanna Posch

NBER Working Paper No. 25612
Issued in February 2019, Revised in January 2020
NBER Program(s):Program on Children, International Finance and Macroeconomics Program, International Trade and Investment Program, Labor Studies Program, Public Economics Program, Productivity, Innovation, and Entrepreneurship Program

Italy and Germany have similar geographical differences in productivity – North more productive than South in Italy; West more productive than 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. 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. Our findings are relevant for other European countries.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25612