Labor Market Reforms as a Source of the Recent Italian Puzzle

Abstract

In this paper we investigate some changes in the Italian economy over the last two decades. Stylized facts show a marked decrease in the unemployment rate starting from the end of the Nineties, and, at the same time, a significant increase in the firms’ market power. Moreover, notwithstanding the decreasing unemployment rate, the real wage has grown less than labor productivity. The institutional reforms of the Italian labor market have mostly influenced recent performance of the Italian economy since they are able to conciliate the increase in mark-up, the decrease in the unemployment rate and the difference in the growth rate between labor productivity and real wage. Using a simple macro- economic model, we show that the observed decrease in both unemployment and real wage can be explained by the fact that labor market reforms have been proportionally more incisive than the increase in the firms’ market power.