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  • International Journal of ManpowerThe Italian productivity slow-down: the role of the bargaining modelLeonello Tronti

    Article information:To cite this document:Leonello Tronti, (2010),"The Italian productivity slow-down: the role of the bargaining model", InternationalJournal of Manpower, Vol. 31 Iss 7 pp. 770 - 792Permanent link to this document:http://dx.doi.org/10.1108/01437721011081590

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    http://dx.doi.org/10.1108/01437721011081590

  • The Italian productivityslow-down: the role of the

    bargaining modelLeonello Tronti

    Dipartimento della Funzione Pubblica, Rome, Italy

    AbstractPurpose – The purpose of this paper is to assess the role of the Protocol ’93 bargaining model infavouring the slow-down of the Italian economy and to design a correction.

    Design/methodology/approach – The impact of the Protocol on factor income distribution isassessed through a deterministic dynamic model, and tested for the 1993-2008 period. The paperexplores theoretically and empirically the weakening of the incentives for both workers and employersto engage in fostering productivity.

    Findings – In a macroeconomic setting with structural imbalance between the product and thelabour markets reforms, the bargaining model has automatically increased up to 2002 the capital sharein income, reducing the incentives for both social partners to accelerate productivity, as the labourshare in income and the propensity to invest are co-integrated ( Johansen test). An analytical solutionfor correcting the bargaining distributive bias is proposed.

    Research limitations/implications – Further research should provide a picture of the differentdistributive behaviours of industrial sectors, particularly for industries exposed to/protected frominternational competition. The actual functioning of the new bargaining model (the Accordo Quadro of2009) should also be assessed.

    Practical implications – The bargaining model should be reformed so as to restore the rightincentives for social partners. National industry-wide wage bargaining should both incentivise andcomplement insufficient local bargaining.

    Social implications – The benefit of increased productivity and resumed growth has vast socialimplications, especially with reference to the sustainability of the welfare system.

    Originality/value – The scientific literature has lacked any formal description of the dynamicoperation of the Italian bargaining model, which is particularly valuable to both social partners andpolicy makers.

    Keywords Collective bargaining, Incomes policy, Productivity rate, Economic change, Recession

    Paper type Research paper

    1. Introduction: The Italian productivity slow-downFor many years before the international financial crisis, the Italian economyexperienced difficulties in growing. After 1995 the Italian GDP registered an annualgrowth rate (1.4 per cent) that is much lower than the EU-15 average (2.2 per cent),France (2.1 per cent), the UK (2.7 per cent), the USA (2.9 per cent), Spain and Greece (3.6and 3.7 per cent, respectively). After 2000, Italy further slowed down to the negativevalues of the present crisis. If Italy has is some way grown as or even faster than someother countries (Germany, Switzerland, Japan), this is due to a stronger employmentgrowth, which has sustained GDP in spite of subdued productivity.

    However, small and persisttent differences can cause dramatic effects over theyears. Italians, who in 1995 enjoyed a per capita income above the European average,higher than the UK and close to such traditionally prosperous countries as France orSweden, over the following decade experienced a sizeable relative impoverishment. In

    The current issue and full text archive of this journal is available at

    www.emeraldinsight.com/0143-7720.htm

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    International Journal of ManpowerVol. 31 No. 7, 2010pp. 770-792q Emerald Group Publishing Limited0143-7720DOI 10.1108/01437721011081590

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  • 2007, in terms of purchasing power standard, they were nine points under theEuropean average and 15 points under the UK. The long-term poor performance of theItalian economy (a 15.2-point fall in its international position) is even more strikingwhen compared to the far smaller adjustments of Germany, France and Portugal, or tothe marked improvements of the UK, Spain, and Greece (Figure 1).

    As in the same period employment has increased strongly (15.6 per cent), the reasonbehind the Italian slowdown can only be traced to productivity growth. In terms ofproduct per employed person, in 1995 Italians scored more than 14 percentage pointsabove the EU average. Today, this advantage has completely vanished. What keepsItaly around the European average is the length of working hours which, given the stillcomparatively limited diffusion of part-time jobs, are on average longer (Istat, 2006).However, if we consider the evolution of hourly productivity (which measures work’sproductive power whatever the duration of working hours), the picture is discouraging.In 1995, the level of average hourly productivity of the Italian economy exceeded theEuropean average by 5 percentage points; in 2007, after a 16-point drop (Figure 2), ithad fallen to 89 per cent of the European average. In addition, while Italy worsened, theother big European countries maintained or even improved their relative positions.

    This disappointing performance is to be placed in the context of three exogenousshocks, common to all the economies of the euro[1]:

    (1) the spreading of new technologies;

    (2) the appearance of new competitors on the global market; and

    (3) the adoption of the euro and the ensuing impossibility to resort to so-calledcompetitive currency devaluations.

    Figure 1.Relative per capita GDP:differences between 2007

    and 1995

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  • These challenges have required European economies to launch structural reforms –and even more so the Italian economy, which historically has been characterised byhigh inflation and an export specialisation in traditional manufactured goods. But theItalian reforms have only partially been implemented[2].

    The hardship of the required measures is to be understood in light of the profoundtransformations that hit the Italian economy and labour market. The agriculturalexodus slowly and progressively ended, and so did the beneficial effects of thestructural transformation process deriving from the substitution of low-productivityagricultural jobs with more productive ones in the manufacturing and servicesindustries (Istat, 2008). Another structural change is the so-called “tertiarisation”, orabsolute and relative increase of employment and value in the service sector (generallycharacterised by lower or stagnant productivity) to the detriment of the manufacturingsector (with higher and more dynamic productivity). In the labour market, the sharpincrease in the supply of immigrant workers and the reform of labour employmentarrangements created many flexible and temporary positions, often in low-skilled, lowproductivity and low pay occupations[3].

    2. Interactions between the goods and the labour market reformsIn this general framework, a common strategy to ensure growth is to make the productmarket as well as the labour market more competitive, the regulation of money supplybeing exogenous. A paper by Blanchard and Giavazzi (2003), proposing a generalequilibrium model with two markets, illustrates the essence of this strategy (Figure 3).The model is recalled here for the clarity and simplicity of its logical links. The basicidea is to push the euro economies, through an institutional shock, to find an

    Figure 2.Relative GDP per hourworked: differencesbetween 2007 and 1995

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  • equilibrium position where rents generated by mark-up are lower because of aprevailing market regime that is nearer to perfect competition.

    First, the liberalisation of the product market should increase the competitivepressure on employers, so containing prices, stimulating innovation and fosteringproductivity growth. Price moderation, innovation and productivity, in turn, allow theeconomy to maintain its competitive position, at least with respect to its closercompetitors. In parallel, a reform of the labour market is needed, in order to moderatewages and labour costs. But moderation should not be driven to the point of becomingcounter-productive: the concurrent competitive pressure on prices and margins mustensure the resilience of the purchasing power of wages and, through this, of theresilience of domestic demand. Any regulation asymmetry affects negatively economicgrowth: if the labour market is too deregulated as compared to the product market,wages lose purchasing power and domestic consumption stagnates; if the productmarket is too deregulated with respect to that for labour, wages are too high,unprofitable firms move elsewhere or go bankrupt, and unemployment grows. Onlythe development of wages’ purchasing power in parallel with competitive price growthboth in the domestic and the international markets provides a virtuous dynamicbalance between the two markets, allowing for the economy to grow steadily.

    Instead, for a country that, like Italy, has implemented a significant reform of thelabour market without having adequately reorganised the product market[4], theconsequences are economically perverse: on the one hand, there is a decline in the shareof labour in income (relative impoverishment of employees and their families); and, onthe other hand, prices grow high – with the double negative consequence of a loss ofinternational competitiveness and a slow-down in consumption. In a context ofincreased international competition, high prices lead to a brake on the export side ofgrowth, while weak consumption hampers growth in the domestic market.

    Figure 3.Structural adjustment: theBlanchard-Giavazzi model

    (product marketderegulation, labour

    market flexibilisation andgrowth)

    The Italianproductivity

    slow-down

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  • The focus of the model rests on the relationship between price and wagemoderation, which synthesises the dynamic balance between product and labourmarkets. For domestic demand, this relationship defines the real wage, while forforeign demand it determines international price competitiveness; in sum, theprice-wage relationship determines the level of income and the conditions forgrowth.

    In the Italian case, however, the long season of state-owned companies’privatisation without liberalisation started in the 1980s and prevented the creationof favourable conditions to keep up with the euro, EU enlargement, and increasingmarket globalisation. This failure is confirmed by the accumulation in the shelteredsectors of mark-up rents, whose value at constant 2000 prices has increasedfive-fold from less than e20bn in 1980-1985 to about e100bn euro per year between1995 and 2007[5] (Figure 4). Mark-up rents accumulate in privatised banking,finance and business services[6], in agriculture[7], in the production of electricity,gas and water, and in social and personal services (Figure 5). Smaller rentincreases, yet larger than the average, are reaped by constructions and trade,repairs, hotels and restaurants, transportation and communication. On the contrary,the most serious profitability decline affects the manufacturing sector, exposed tointernational competition.

    So, the enforcement of a strong labour market reform in a macroeconomic settingbiased by a poorly competitive product market facilitated prices and margins puttingthe burden of competitiveness on wages. This has led to a long period of real wagecompression (Figure 6), accompanied by a progress of both domestic and export pricesso that they are higher than those of competitors (Figure 7), with the consequence of asluggish domestic demand and a worsening trade balance[8].

    Figure 4.Mark-up rents in theItalian economy,1980-2007 (constant 2000prices)

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  • Figure 5.Normalised mark-up rents

    in Italy by economicactivity, years 1980-2003

    Figure 6.Real compensation per

    employee: years 1995-2006

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  • 3. The bargaining model and its consequences3.1 The July 1993 Protocol and functional income distributionCauses and consequences of the macro-economic malfunctioning of the Italian labourmarket reform are easier to understand if one bears in mind Italy’s historicalexperience in wage fixing. To do so, one can assume as starting point the income policyexperiments of the 1980s, aimed at taming 20 per cent inflation through the fixing of anannual inflation target agreed by the Government, the central bank, and social partners(so-called concertazione). Based on the inflation target the Government had to regulatecontrolled and administered prices, entrepreneurs the market prices of goods andservices, trade unions the evolution of the so-called scala mobile (literally, the “slidingscale”, namely the mechanism that automatically adjusted the wage scale to inflation),and the central bank the money supply.

    Figure 8 shows the explosive effects on prices and wages of the two oil shocks of1973-1974 and 1979-1980. These were followed by a cooling down period, in which the“concerted” incomes policy experiments inspired by Ezio Tarantelli[9] (the “lodo Scotti”of 22 January 1983 and the St Valentine Decree of 14 February 1984), and thesubsequent referendum to reintroduce scala mobile “frozen” by the St Valentine Decree,played an important role.

    The incomes policy experiments of the 1980s can be summarised using the mainpoints of Tarantelli’s proposal (Tarantelli, 1995):

    . He considered price stability as a public good, that cannot be the produce of onesingle agent, but must be the result of a cooperative behaviour of the relevantactors of industrial relations (Government and the social partners) and thecentral bank.

    . The stability of the labour and capital shares in the functional incomedistribution (so-called “Bowley’s law”, see section 3.2 below) is considered the

    Figure 7.Export prices in Italy andin the euro area countries:years 1995-2008

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  • golden rule of incomes policy because, other conditions being equal (and in asituation of full employment), it ensures maximum wage growth compatible withthe absence of pressures on the profit rate and domestic prices.

    . A forward-looking wage policy is considered the only way to break the perverseprices-wages spiral interrupting the continuing of past inflation into present time(a link then assured in Italy by the scala mobile and, in many other advancedcountries, by similar automatic wage-adjustment mechanisms). The proposal isto agree in advance wage increase targets in line with the expected inflation rate,instead of recovering the purchasing power lost in the past, guaranteeing towages, through special safeguarding clauses, coverage from the risk of anydifference between actual and expected inflation.

    . Wage targeting is able to curb inflation by slowing down the scala mobile andalining it with the growth target of basic wages, this being agreed and thuscoherent with the behaviour of other partners in the income policy game(Government, the central bank and entrepreneurs), in a regime of reciprocalsurveillance. Concertazione is considered an alternative to money supplyreduction, because it is Pareto preferable, not entailing the social consequencesthat usually come with a freezing of economic activity from the money supplyside.

    After the referendum that confirmed the incomes policy experiment of 1984, in 1986 thescala mobile was partially reformed and, in 1991, the industrial employers’ organisation(Confindustria) unilaterally terminated the 1945 bilateral agreement on it. Hence, a newwage bargaining model was launched through the ensuing social pact, ratified by theJuly 1993 Protocol[10].

    Figure 8.Inflation and wages in

    Italy: 1982-1984agreements, referendum

    on the sliding scale and the1993 July Protocol (yearly

    rates of percentagechange)

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  • The Protocol provided for two separate, non-overlapping tiers of wage bargaining.The first is national, industry-wide collective bargaining, whose only goal was topreserve the basic wage purchasing power. Any increase in the national, industry-widebasic wages, set every two years, must be coherent with the target inflation rate.Should there be a difference between this and actual inflation, it was possible to recoverit during the following two-year period (safeguarding mechanism). Through four-yearagreements, local bargaining (the second tier), at either an enterprise or a territorylevel, should regulate the growth of real wages according to the achievement of locallybargained productivity, profitability or production quality targets.

    The main hypothesis of this paper is that the mechanism of the Protocol made theinvariance of factor income distribution very unlikely and, in contrast, under normaleconomic conditions automatically favoured the capital share. Such a feature of thebargaining model would make weaker or null the need for employers to negotiate withtrade unions and the Government any counterpart for such an income shift – forinstance in terms of investment, employment targets, workplace re-engineering, etc.

    Linked to the first hypothesis is therefore a second. The main objectives of theProtocol drafters were:

    . controlling inflation imported through the lira devaluation of 1992-1993 (the lastcompetitive devaluation of the Italian currency before abandoned it for the euro);

    . favouring the recovery of employment in the midst of a dramatic employmentcrisis; and

    . favouring economic growth through local bargaining diffusion and wageflexibility, both aimed at spurring productivity growth.

    Now, it can be easily acknowledged that inflation has been put under control andemployment has strongly increased, particularly after the liberalisation of flexibleworking arrangements (the so-called “Treu Package” of 1997 and “Biagi Law” of 2003);nonetheless, it must also be admitted that the third aim has clearly been missed(Tronti, 2006)[11]. In fact, local wage bargaining has failed to reach a large proportionof workers, wages have only modestly increased their flexible component, and neitherproductivity nor economic growth has been boosted. Income has shifted from labour tocapital but, under the described dynamic imbalance of the Italian economy, this hasimplied a growth slow-down. Figure 9 represents this stylised fact intuitively, showinga weak but positive long-term relationship between the level of the labour share in yeart and the average growth rate in the subsequent three-year period t_t þ 2[12].

    3.2 Protocol ’93 and Bowley’s LawIn order to provide a theoretical explanation of these hypotheses, it is useful to analysein detail the mechanism laid down in Protocol ’93 by means of a formal model. With wbeing the wage rate, ND dependent employment (wage earners), Q total real income andp prices, the labour share in income (SL) can be defined as follows:

    SL ¼ w ·ND ·Q21 · p21; ð1Þ

    From (1), by multiplying and dividing per total employment NT, and substituting thelabour productivity p to income per employed person, we obtain:

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  • SL ¼ w · nD ·p21 · p21: ð1:1Þ

    where nD indicates the proportion of wage earners in total employment.Following Arthur Bowley’s studies on income in Great Britain (Bowley and Stamp,

    1927), the hypothesis of the constancy of the share of labour in income over time hasbeen known as Bowley’s Law. The functional distribution of income came to play aprominent role in economic theory with the contribution of post-Keynesian economists,who considered it dependent on the rate of output growth. In the short run, an increasein the rate of economic growth is not offset by wage increases and causes a shift indistribution in favour of capital income. Post-Keynesian economists thus provide aninterpretation of short-term variations of the functional distribution of income,accompanied by a projected constancy of income shares over the long term. As we willsee, Bowley’s Law implies that the real wage rate grows at the same pace as labourproductivity, not so much for an implicit (and unsustainable) judgment on the “merit”of productivity gains, but for macroeconomic considerations. Because of the differentpropensities to save (and consume) of workers and entrepreneurs, in fact, regulatingthe functional distribution of income can bring domestic savings (or consumption) tomatch the investments (or domestic demand) needed to achieve the desired rate ofgrowth and/or full employment. For Kaldor (1957), stability over time of the functionaldistribution of income stems from the constancy of the profit rate, and the coincidenceof the growth of the capital-labour ratio with that of labour productivity (whichprescriptively allows for the economy to follow a balanced growth path). Equation (1.1)allows us to obtaining easily the known wage growth condition assuring theinvariance of the labour share:

    Figure 9.Italy: level of the labour

    share in income in year tand average GDP growth

    in the three-year periodt_t þ 2, years 1971-2006(annual average growth

    rates and percentagepoints; raw labour share)

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  • _SL < 0 , _w < _pþ _p2 _nD: ð2ÞEquation (2), where the superscript dots indicate proportional growth rates, clarifiesthat Bowley’s Law holds only when the wage rate growth equals the sum of inflationand productivity gains, net of the change in the share of wage earners in totalemployment.

    We can now introduce a simple algebraic model of the institutional operation ofProtocol ’93 wage bargaining mechanism in a dynamic setting. With w1 being thefirst-tier (national) wage rate and w2 the second-tier (local) wage rate, the total wagerate growth will be:

    _w ¼ a _w1 þ ð12 aÞ _w2 witha [ ½0; 1�; ð3Þwhere a is the incidence of first-tier on total wage. As Protocol ’93 requires that thiswage component moves only with inflation (_p), per effect of the target inflation rateand the periodical recoveries of the gaps between this and actual inflation, and thatproductivity gains are rewarded only in second-tier bargaining[13], we can thenrewrite the dynamic model with respect to the reference variables for the twobargaining tiers:

    _w ¼ a_pþ ð1 2 aÞq _pwithq ¼ _pþ b: ð4ÞIn equation (4), q (which can be positive, negative or null) is the parameter that linkssecond-tier wage growth to productivity gains. We think it can play two distinct roles:

    (1) just preserving the second-tier wage purchasing power; or

    (2) making the second-tier real wage grow along with productivity gains, throughthe parameter b ¼ ð _w2 2 _pÞ= _p.

    Equation (4) clarifies that Protocol ’93 is based on the idea that businesses should beprotected from increases in real wages not covered by productivity gains.

    In the Protocol ’93 framework, the wage rate can comply to Bowley’s Law only if thesecond-tier wage growth meets some rather strict constraints. Under the hypothesisthat national, first-tier wage moves only and strictly with inflation, we obtain thegrowth of w2 that meets the law ( _w

    *2):

    _SL ¼ 0 , _w1 ¼ _p and _w*2 ¼ _pþ b* _pwithb* ¼1

    1 2 a. 1: ð5Þ

    Equation (5)[14] indicates that the real local wage rate must increase its purchasingpower according to the growth rate of productivity multiplied by factor b *. This factoris by definition positive and larger than 1, and the lower the incidence of second-tierwage, the greater it will be. In the Italian economy, the difference between total wageand first-tier wage leads to an estimate that b * has a high average value, close to 7 (seeTable I), due to the poor diffusion and relative weakness of second-tier, localbargaining. Hence, since Protocol ’93 establishes that national, industry-wide basicwages are to remain anchored to their 1993 purchasing power, for the economy tomaintain an unchanged income distribution, local bargaining should preserve thesecond-tier wage purchasing power and regulate the growth of the entire real wages(first- and second-tier) to equalise labour productivity gains. But to do so, the

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  • second-tier wage should grow considerably faster than productivity itself (about seventimes faster), and maintain its purchasing power even when productivity is stagnant.Another limit consequence of the model, should it grant the distribution invariance,would then be that the proportion of the local component in the total wage should growover time until is becomes the main wage item, the only situation in which this could bereduced being when labour productivity drops:

    _p , 0 , _w*2 , _p , _w*2 , _w1 ¼ _pIn sum, the formalisation of Protocol ’93 makes clear that the design of making wagesmore flexible and building a stronger tie between wages and productivity growth canbe obtained only by assuring a relevant empowerment of local bargaining.Furthermore, as the Protocol did not make the second-tier wage enforceable by allworkers, neither did state it had to be protected from inflation, nor it should grow up toensuring that real wages grow with labour productivity, it is immediately apparentthat it had made the compliance with the Bowley’s Law quite unlikely. As is widelyknown, the Italian economy is characterised by a very large number of small and verysmall enterprises, which are difficult to cover with collective local wage agreements.Medium-sized and large enterprises also present considerable differences in terms ofunionisation and presence of local bargaining by industry and territory. As aconsequence, after 16 years of application, still less than 35 per cent of wage workersare covered by a second-tier collective agreement (Casadio, 2008).

    So, in order to analyse the actual relationships between productivity growth andfunctional income distribution, we introduce the parameter g, that expresses the ratioof the value of b to that of b*. Analytically, g synthesises the coverage of local wagebargaining, and the extent to which it bargains a wage growth that assures invarianceto the factor distribution:

    g ¼ bb*

    ¼ ð1 2 aÞ · _w2 2_p

    _p: ð6Þ

    Periods 1993-1995 1996-2000 2001-2008 1993-2008

    Labour productivity 2.9 1.0 0.1 0.9Employment 21.4 0.8 0.8 0.4Basic nominal wage (first tier) 2.6 2.9 2.9 2.8Local nominal wage (first tier) 15.3 7.8 4.6 7.5Total nominal wage 3.7 3.5 3.1 3.3Output prices 3.9 2.7 2.7 2.9Real total wages (output prices) 20.1 0.8 0.4 0.4Wages’ income share 22.9 20.1 0.8 20.2Wage earners in total employment 0.1 0.1 0.4 0.3Output growth 1.5 1.8 0.9 1.3A 0.90 0.88 0.85 0.87B 3.76 5.10 19.87 5.04b * 9.89 8.50 6.76 7.75G 0.38 0.60 2.94 0.65

    Source: Istat (contractual wages, national accounts, consumption prices)

    Table I.Labour productivity,

    nominal and real wages,and functional income

    distribution: totaleconomy – selected

    sub-periods in 1993-2008(average sub-period

    yearly percentage growthrates; average coefficient

    absolute values)

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  • The parameter g reaches 1 when all employees have a second-tier contract and/or thewage increases fixed by local agreements satisfy the invariance according to equation(5). Based on productivity growth and the value of g, we can obtain how the design ofProtocol ’93 and its concrete application combine in determining the movements offunctional income distribution:

    _p . 0and g , 1 ) _SL , 0and g ¼ 1 ) _SL ¼ 0

    8<:

    _p < 0 and g . 1 ) _SL . 0

    8>>>><>>>>:

    ð7Þ

    Under normal functioning of the economy, labour productivity grows. However, thestructurally insufficient coverage of local wage bargaining automatically increases theshare of capital. Relative factor shares can remain constant only when productivitygrows and, at the same time, parameter g equals 1: a not very probable situation.

    The really perverse result, however, is that the bargaining model can rebalance thebias in favour of capital only if productivity stops or drops. In particular, the labourshare will grow in three cases:

    (1) when productivity growth is slightly positive and g . 1;

    (2) when productivity growth is around zero and _w2 . _p (b is large and positive);and

    (3) 3), when productivity shrinks and b is negative, so that its product with _p ispositive, and again _w2 . _p.

    The industrial relations system is thus projected in a situation in which the incomedistribution conflict revolves around productivity growth, creating a situation in whichlabour may rebalance income distribution only by reducing effort and productivity atthe expenses of economic growth.

    4. Productivity, local bargaining, and the labour shareWith the help of the model we can now analyse the actual operation of the Protocol ’93bargaining model and its effects on the income distribution to factors. The period ofapplication of the Protocol (1993-2008) can be divided this into three sub-periods, basedon productivity cycles (Table I).

    The first (1993-1995) includes the launching and first application of the newwage-fixing model. In connection with the most serious employment crisis after theSecond World War, labour productivity increases by 2.9 per cent per year. From thepoint of view of wage bargaining, the sub-period is characterised by collectiveagreements being suspended in public administration and local agreements in theprivate sector. National basic wages stay behind inflation and the g coefficient has anaverage value of 0.38, so that the wages’ share falls by 2.9 per cent per year.Notwithstanding the consistent employment loss, output growth is pushed by labourproductivity to reach an average yearly rate of 1.5 per cent. This sub-period can belooked at as an example of the first case in equation (7), in which productivity growsand functional distribution is subject to a relevant shift in favour of capital.

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  • The second phase (1996-2000) sees the full implementation of the Protocol and acertain development of local collective wage agreements. The coefficient a getsreduced from 90 per cent to 88 per cent. Labour is cheaper and employment returns togrowth at a yearly rate of 0.8 per cent, while productivity slows down to 1 per cent.New wage agreements are made in the public sector and, in an effort to recoup the lostpurchasing power, first-tier wages pass inflation by 0.2 percentage points per year.Total wages too now increase their purchasing power, but still by less than what isneeded to ensure Bowley’s Law, so that the wages’ share continues to reduce, even if ata much slower pace (20.1 per cent per year). Output growth accelerates to 1.8 per centper year, benefiting from both employment and productivity gains. This sub-period isthe closest to the second case of relationships (equation 7), as the average value of g isnearer to 1 than in any other sub-period.

    The last, longer phase (2001-2008) is marked by a stagnation in productivity: only0.1 per cent per year, the average value hiding three actual falls in 2002 (20.7 per cent),2003 (20.9 per cent), and 2008 (20.8 per cent). First-tier wages discard too low,unrealistic target inflation rates (the average distance of target from actual inflationbeing 20.6 points), and again pass over both these and actual inflation. Despite this,the first-tier share in total wages (a) goes on declining (from 88 per cent to 85 per cent)as second-tier bargaining attributes to wages almost 0.7 points per year more thanwhat is required to keep the factor distribution unchanged. The presence of some driftwith respect to both basic and locally bargained wages can probably be ascribed to therapid fall of in the Italian unemployment rate from above 10 per cent (in 2000) to 6.4 percent (in 2007), and would suggest that Italy experienced a certain reduction in thewillingness to be employed for at least some categories of workers. Pastore (2010) findsrobust econometric evidence that, after the introduction of Protocol ’93, the negativecorrelation between real wages and the unemployment rate was re-established,although with a low elasticity, perhaps thanks to increasing labour market flexibility.The wage drift, moreover, is allowed for by the Government progressively reducing thetax wedge on wages: wage increases are accommodated by cuts in non-wage labourcosts. The productivity halt pushes up b to 19.9 and, as b * is about 6.8, g jumps upjust below 3. Consequently, wages’ share in income recovers a sizeable part of theground lost since 1993, increasing by 0.8 per cent per year (Table I). Labour, however,is still cheap enough for employers to persist in expanding the workforce in lowproductivity industries, and the weak GDP growth is mainly driven by employment.We are therefore in the situation depicted by case 3 in equation (7): productivitystagnation, combined with the downward rigidity of real basic wages and a resilienceof local wages, causes a rebalancing of factor income distribution.

    5. The effects of the income shift on investment and growthThe shift in functional income distribution caused by the structural imbalance betweenthe product and the labour markets and the diffusion of flexible work arrangements,even if increasing employment and profits, within a few years have brought aboutsluggish growth and productivity stagnation – a situation allowing for a partialrecovery of wages’ share in income. The fall in the probability of being rewarded forproductivity gains may have weakened the effort of the large majority of workers notcovered by second-tier bargaining. But what happened on the employer’s side? Quitethe contrary to what was affirmed in many media debates, higher profitability has not

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  • implied any proportional increase in investment (Figure 10): if in 1981 investmentamounted to 82 per cent of gross profits, in 2007 – regardless of capital marketdevelopments, privatisations, collective bargaining and labour market reforms – theywere 71 per cent, 11 points lower. The reason for this is simply that the price of labourrelative to investment decreased so much that entrepreneurs, in accordance with theso-called “Ricardo Effect” (von Hayek, 1942; Sylos Labini, 1984, 2004), preferred toemploy more people rather than engage in modernising their technical equipment andorganisations. The limited space of this paper does not allow treatment of this pointmore in depth (e.g. by examining the fall of the ICT investments at the industry level,as well as their depressing effect on aggregate productivity[15]); however, it could wellbe related to the weakness of product market reform discussed in section 2. Here it issufficient to mention a more general mechanism, affecting investment, independent ofits ICT content. The Ricardo effect finds its explanation in the classical notion ofinduced, factor-biased technical change, which clarifies that the rise in the profit sharereduces the incentive for firms to engage in labour-saving technical change, thusreducing the rate of growth of the capital-labour ratio and hence (given a constantoutput-capital ratio) the rate of growth of labour productivity.

    In the Italian case, as a matter of fact, the capital-labour ratio has declined from a 3.3per cent yearly rate of growth in 1980-1995 to 1.1 per cent in 1995-2007, while the profitrate, fed by mark-up rents maintained a relatively high level up to 2004 (Figure 10).Consequently, after 1994 the output-investment ratio followed an ever-declining path,and productivity fell as well. The reduction in productivity growth since 1995 alsoimplied that any given rate of growth has been associated with faster employment

    Figure 10.Profits, investments, andoutput, 1980-2007

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    http://www.emeraldinsight.com/action/showImage?doi=10.1108/01437721011081590&iName=master.img-010.jpg&w=327&h=241

  • growth (although the drop in the rate of growth of output following the decline in thewage share, ceteris paribus, has reduced also the rate of growth of employment).

    The operation of the Ricardo Effect in the Italian economy finds a direct empiricalsupport in the presence of a long-term, strong positive relationship between the labourshare and the propensity to invest (the ratio of investment to profits) (Figure 11). TheJohansen test ( Johansen, 1988) run on the two series (see the Appendix) shows thatboth series are non-stationary but a linear combination of the two is stationary, so thatthe series are co-integrated[16]. In the long period from 1971 to 2007, a diminution inthe labour share in income, implying an increase in the profit rate, has been linked to afall in the propensity to invest and, vice versa, a growth in the labour share has impliedan increasing propensity to invest.

    6. Correcting the bargaining modelIt is therefore not surprising that the economy gradually slowed down. Productivitygains are due to expensive and challenging technological and organisationalinvestment, carried out at the workplace level. However, from the bargaining modelperspective, neither employers nor employees were sufficiently rewarded by Protocol’93 for this. The incentive system built on the imbalance between the poor regulation ofthe product market and the biased bargaining model has simply discouraged growth.This imbalance needs to be corrected.

    To do this it is first necessary to acknowledge that both social partners are to berewarded for increasing productivity, and this result can be obtained only if the incomedistribution to factors is relatively stable. The second step is to recognise that localwage bargaining will never cover all wage workers, and, consequently, nationalbargaining cannot unload totally onto it the task of increasing the wages’ purchasingpower to keep income distribution stable.

    Figure 11.Long-run relationship

    between the labour shareand the propensity to

    invest, Italy, 1971-2007(percentage values)

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    http://www.emeraldinsight.com/action/showImage?doi=10.1108/01437721011081590&iName=master.img-011.jpg&w=326&h=202

  • In order to see how national wages should reinforce and complement local wages, wemay start from a very general real wage growth definition in the Protocol framework.As real second-tier wage varies in some proportion to productivity gains (b), thegrowth of total real wage will be:

    _w2 _p ¼ að _w1 2 _pÞ þ ð1 2 aÞb _p: ð8ÞBy substituting equation (8) in equation (2) expressed in real terms, and keeping thelabour share constant, we have:

    að _w1 2 _pÞ þ ð1 2 aÞb _p ¼ _p2 _nD ð9ÞWe can then solve equation (9) for the growth rate of first-tier wage that keeps thelabour share unchanged ( _w*1):

    _w*1 ¼ _pþ d* _p21

    a_nD;

    where:

    d* ¼ 1 þ ða2 1Þba

    ;

    and d* # 1.Equation (10) shows that, in order to preserve the income distribution to factors,

    first-tier wages must grow not only with prices, but also with respect to productivitygains. The coefficient d*, which links national wages to productivity, is equal to 1 onlywhen first-tier wages coincide with total wages (a ¼ 1), and varies inversely with thestrength of the second tier (b), and directly with the first-tier share in total wage (a).According to the data presented in Table I, the average value of d * for the period1993-2008 is 0.4. Furthermore, as in equation (10) the change of the share of wagelabour in total employment (_nD) is divided by a, and this is less than 1, the value of thisrate is no more negligible, and should be considered when negotiating national wages.Its relevance is to increase with the share of the local component in total wages.

    In the actual arena of industrial relations, as a matter of fact, in 2009 the ItalianGovernment and social partners, pressed by the international crisis, have underwrittena further reform of the bargaining model. The new pact (Accordo quadro sulla riformadegli assetti negoziali, 22 January 2009) recognises that social partners have de factobroken the inflation target discipline of Protocol ’93, and therefore abandons theprogrammed inflation rate as reference indicator for national, first-tier wagebargaining. In its role the new pact introduces a simple forecast of the Europeanharmonised index of consumer prices (HICP), net of imported energy products, with asafeguarding rule for forecasting errors. National, first-tier collective agreements are tolast three instead of two years, thereby reducing the bargaining burden. New rules aredevoted and strong emphasis is put on the need to develop local bargaining (but theeconomic incentives are rather weak)[17]. Finally, a new wage item is introduced(Elemento Economico di Garanzia, or guarantee economic element), whose amount is tobe determined by national agreements, to cover with additional income those workerswho have no access to second-tier bargaining and who do not receive any economicbenefit further to basic wages. According to our analysis, provided the aggregate

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  • amount distributed to workers excluded from the second-tier wage is about the size ofd*, this last could be the key measure (within the framework of a bargaining modelaffected by many shortfalls) that could restore for both social partners (in the mediumrun) the convenience to engage in fostering productivity.

    7. Conclusions: completing the structural adjustment and correcting thebargaining modelThe Italian economy is still in the middle of a structural adjustment ford. From 1995 to2008 employment grew consistently, and the workforce has progressively includedsegments of female, elderly, young and migrant labour excluded before. Thissignificant enlargement, mainly concentrated in market-oriented services, has beenparalleled by a sharp international repositioning in the area of productivity, incomeand growth – a signal of unsolved structural problems. Even if we think that the newentrants into employment may have been less or more poorly educated, or only lessexpert, such a harsh employment-productivity trade-off did not confront any otherEuropean economy of similar or even greater employment growth.

    In order to face the challenges posed by new technologies, new global competitorsand the unique European currency, Italy has launched reforms to privatise state-ownedcompanies and to renew as well the wage bargaining model and the labour contracts.The product market reform, however, has been incomplete, as privatisations have notbeen followed by effective liberalisation measures, so that the wage moderationactually obtained by labour market reforms has had counter-productive effects ongrowth. Italy has been characterised for many years (and still is) by lower wages andhigher prices than its competitors. While allowing for constant, long-term growth ofemployment and for a high level of business profitability, wage moderation notaccompanied by low prices has ensured neither the maintenance of domestic demandnor the international competitiveness of Italian products. Increased mark-up rents haveburdened and slowed down economic growth and debased the international position ofItalian income.

    Protocol ’93 automatically compressed the labour share in income as long asproductivity grew. In the long run, however, the downward rigidity of real wages,assured by the same bargaining model even in the presence of null or negativeproductivity growth, has slowly but constantly restored the labour share. And theinternational financial crisis has lately broken the high employment-high profits spell,inducing considerable employment losses and business shutdowns. The crisis ispushing employers to acknowledge they have to reorganise, and clarifies that thisshould be the moment for Italy to launch an effective reform of the product market andto correct the wage bargaining model.

    On the bargaining model side, as a matter of fact, at the beginning of 2009 the socialpartners and the Government underwrote a new reform. The new pact presents littlenovelty, but it introduces a new wage item (the guarantee economic element) to coverwith additional income workers who have no access to second-tier bargaining. Thepaper argues that this last could be the key measure to restore for both social partnersthe convenience to engage in fostering productivity, provided the benefit is linked toproductivity growth, is directly proportional to the first-tier share in total wage,inversely proportional to the strength of second-tier wages, and corrected according tothe movements of wage earners’ share in total employment. In the perspective of facing

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  • from the labour market side, ie. the low-growth trap of Italian economy, this “guaranteewage” is the only substantial novelty with respect to Protocol ’93, in that it can give tosocial partners the possibility to explicitly negotiate the movements of factor incomedistribution. However, as the pact is totally vague on its amount and on the way tocalculate it, the actual role of this benefit – that should exert its beneficial influenceonly over the medium run – will depend entirely on the first-tier negotiators’far-sightedness. Furthermore, the resumption of a desirable growth record requiresItaly to finally face structural adjustment in the product market, and this can be eased,not substituted for by bargaining model reform.

    Notes

    1. For a more accurate analysis of how technological and institutional (non-technological)shocks in the labour market have caused the aggregate European productivity slowdown inrespect of the USA, see Saltari and Travaglini (2009).

    2. See, among others, Sylos Labini (2004), Boeri et al. (2005), Saltari and Travaglini (2006),Daveri (2006) and Rossi (2009).

    3. Flexible or even precarious employment, with low wages and under-used human capital,mainly affects young people (see, among others, Contini and Trivellato, 2006). Other majorweaknesses of the Italian economy are: the continuing heavy burden of public debt, inheritedfrom the 1980s; the privatisation of state-owned companies and the ending of their previousdriving role in strategic investments in technology and innovation; and a long period of “badtycoons” and raiders in the private sector, more committed to stock-climbing, breaking upand reselling companies for huge capital gains, rather than to innovating and re-organisingthem so to keep up with the global market.

    4. On this point, among many others, see the recent book by Rossi (2009). The labour marketreform side is discussed below, in paragraph 3.

    5. On the basis of international literature (see Griffith and Harisson, 2004), I consider here asmark-up rents profits exceeding the “normal” rate of profit in a competitive market. Theprocedure to estimate rents used by Griffith and Harisson is based on the mark-up of valueadded with respect to the sum of labour and capital costs. In particular, they estimate capitalcost as a user cost of the capital stock, and they assume it to be equal to a constantproportion (10 per cent). In this way, they find in the case of the Italian privatenon-agricultural sector the highest rents of all countries considered (14 EU countries plus theUSA): more than 1.40 between 1985 and 2000, against a 1.26 average. Furthermore, Italyshows the fastest increase, reaching 1.5 at the end of the period. Their conclusion is that Italyis not only less competitive than the average countries considered, but it is continuouslylosing its competitiveness. The Griffith and Harisson indicator, however, may overestimaterents because it does not take into account the labour income of the self-employed, who inItaly are particularly numerous. When this feature is considered, the aggregate income tolabour becomes higher and capital cost and rents are correspondingly lower. Therefore, aslightly different measure is proposed here, based on the following formula (see Tronti,2006): P ¼ Y 2 ½ðW þW seÞ þ Kc�, where P represent mark-up rents, Y is value added, W isthe labour cost, Wse is the labour income of the self-employed, and Kc is the user cost ofcapital. In this measure capital cost is assumed to be equal to 7.5 per cent of capital stock atsubstitution prices. The capital cost calculated this way is, on average, around 3.5percentage points of capital stock higher than depreciation. In the private non-agriculturalsector alone in the period 1985-2000 (the time and sector coverage of Griffith and Harisson),

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  • my estimate of the average value of the Italian rents is 1.2, and the value in the final year1.26.

    6. To some extent, part of the income of professionals should also be taken as a rent (and isincluded in the calculation), considering the low degree of competitiveness existing in theirsector and the high barriers to entry.

    7. As a matter of fact, Italian agriculture has been interested in the recent past by a systematicthrust toward quality improvement and brand protection. As a consequence, notsurprisingly, profits have been boosted and the long “employment exodus” which beganin the 1930s appears to be finally coming to an end.

    8. It may be worthwhile to note that the data presented in Figure 6 refer to gross compensation,including both taxes on labour and social contribution. Over the 25 years from 1980 to 2005,the taxes on labour and pensions rose from 66 to 74 per cent of personal income tax revenue.As in the meantime the share of employment in income has fallen dramatically (see section 4,Figure 11), we can deduce that employees have suffered a double income curtailment, in boththe functional and personal distribution of incomes.

    9. Ezio Tarantelli (1940-1985), an economist in the Research Department of the Bank of Italy,and later Professor at Rome “La Sapienza” University, strongly engaged in the struggleagainst inflation through social pacts. He was killed by the Red Brigades, a terroristorganisation, a short time before the referendum that confirmed his policy prescriptions onthe curbing of inflation via concertazione.

    10. The full text of the Protocol is available at: www.camera.it/temiap/Protocollo_23_07_1993_Concertazione.pdf (accessed 3 July 2010).

    11. Protocol ’93 included the provision of a review after five years of application, aimed atverifying its effects and suggesting possible adjustments. For the review, the ProdiGovernment established in 1997 a committee of experts chaired by the law scholar GinoGiugni, who proposed some changes and a more comprehensive inclusion of the Protocolprinciples within the institutional framework regulating the Italian industrial relationssystem. The proposal, however, never obtained the necessary consensus, and the bargainingmodel remained in force until 22 January 2009, when the Berlusconi government, allemployers and all labour organisations with the exception of CGIL (the major Italian labourunion) signed a new Framework Agreement on bargaining arrangements (see section 6).

    12. More than a strong positive relationship, the scatter seems to show several shifts from theNortheast to the Southwest of the graph of a negative (sometimes almost vertical)relationship. This suggests that, further to the (weak) positive long-run relationship, othershorter-term forces have been at work. Anyhow, both the shifts’ continuing path and thedirection of influence indicated by the time lags are impressive. On the urgent need toreconsider carefully the theoretical link between income distribution and growth, seeSkidelsky (2010).

    13. See the description of Protocol ’93 in section 3.1 above. See also, among many others,Accornero et al. (1998).

    14. The formula does not consider the change of the wage employment incidence on the total,which in the short run can be assumed to be constant.

    15. On this see, among others, Ciccarone and Saltari (2010).

    16. The Johansen test is a test of the measure of the rank of the matrix of the structural form ofthe multivariate model. In case of a bivariate matrix its interpretation is: rank ¼ 0 meansthat both series are stationary, rank ¼ 1 means that both series are non-stationary, butthere exists a linear combination of the two that is stationary (i.e. the series are

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  • co-integrated), and rank ¼ full means that both series are not stationary and notco-integrated. In the case of the two series in Figure 11 (see the Appendix) it is possible toreject rank ¼ 0 (trace test p-value ¼ 0.0003), but it is not possible to reject rank ¼ 1 (tracetest p-value ¼ 0.0936). Data are then compatible with the hypothesis of presence ofco-integration.

    17. For a detailed and critical discussion of the Accordo Quadro with special reference to thelikely results of the new wage-fixing mechanism, see Acocella and Leoni (2010).

    References

    Accornero, A., Attolini, E., Bellardi, L., Biagi, M., Borgomeo, C., Brunetta, R., Carrieri, M.,Dell’Aringa, C. and Giugni, G. (1998), Il Protocollo del luglio 1993. Spunti per un dibattito,Franco Angeli, Milan.

    Acocella, N. and Leoni, R. (2010), “La riforma della contrattazione: redistribuzione perversa oproduzione di reddito?”, Rivista Italiana degli Economisti, forthcoming.

    Blanchard, O. and Giavazzi, F. (2003), “Macroeconomic effects of regulation and deregulation ingoods and labour markets”, Quarterly Journal of Economics, Vol. 118 No. 3, pp. 879-907.

    Boeri, T., Faini, R., Ichino, A., Pisauro, G. and Scarpa, C. (Eds) (2005), Oltre il declino, Il Mulino,Bologna.

    Bowley, A.L. and Stamp, J.C. (1927), The National Income 1924: A Comparative Study of theIncome of the United Kingdom in 1911 and 1924, Clarendon Press, Oxford.

    Casadio, P. (2008), “Ruolo e prospettive della contrattazione aziendale integrativa: informazionidall’Indagine della Banca d’Italia”, paper presented at the 2008 National AIEL (ItalianAssociation of Labour Economists) Conference, Brescia University, Brescia, available at:www.aiel.it/bacheca/BRESCIA/papers/casadio.pdf (accessed 28 June 2010).

    Ciccarone, G. and Saltari, E. (2010), “Produttività e capitale innovativo”, in Ciccarone, G.,Franzini, M. and Saltari, E. (Eds), L’Italia possibile. Equità e crescita, Francesco BrioschiEditore, Milan.

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    Appendix

    Case 3: Unrestricted constant QL Il_Pld

    Rank 0 1Eigenvalue 0.50281 0.075124Trace test p-value 27.968 25.156

    [0.0003] [0.0004]Lmax test p-value 2.8114 2.8114

    [0.0936] [0.0936]Beta (co-integrating vectors)

    QL 0.69925 20.075423Il_Pld 20.76464 20.1034

    Alpha (adjustment vectors)QL 20.76464 20.1034Il_Pld 22.1066 0.84513

    Renormalized betaQL 1.0000 1.4425Il_Pld 20.17123 1.0000

    Renormalized alphaQL 20.53468 0.0054063Il_Pld 21.4730 20.044188

    Long-run matrix (alpha £ beta)QL 20.52688 0.096958Il_Pld 21.5368 0.20803

    Notes: Number of equations: 2. Lag order: 1. Estimation period: 1973-2008 (T ¼ 36)

    Table AI.Johansen co-integration

    test for the labour sharein income (QL) and the

    ratio of investment toprofits (Il_Pld) time series

    The Italianproductivity

    slow-down

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  • About the authorLeonello Tronti is Economic Adviser to the Italian Minister for Public Administration andInnovation and Director-General for Public Employees’ Training. He studied Philosophy at theState University of Milan and, as a Fulbright-Hays scholar, Economics at Pennsylvania StateUniversity. He has been Assistant to Ezio Tarantelli at Isel, Senior Researcher at Istat, andSecretary-General of the Giacomo Brodolini Foundation. He teaches Labour Economics at RomaTre University, and has taught at La Sapienza and Luiss Universities in Rome. He has beenPresident of the Italian Labour Economists’ Association. Leonello Tronti can be contacted at:[email protected]

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