Competitiveness and Wage Bargaining Reform in Italy

39 Pages Posted: 5 Apr 2018

See all articles by Alvar Kangur

Alvar Kangur

International Monetary Fund (IMF)

Date Written: March 2018


The growth of Italian exports has lagged that of euro area peers. Against the backdrop ofunit 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 donot 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: Europe, Exports, Italy, Labor costs, competitiveness, exchange rate, labor market reforms, wage bargaining, 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

JEL Classification: C53, C54, E24, E31, F14, F16, F41, J31, J51, J52,

Suggested Citation

Kangur, Alvar, Competitiveness and Wage Bargaining Reform in Italy (March 2018). IMF Working Paper No. 18/61. Available at SSRN:

Alvar Kangur (Contact Author)

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
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