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Assessing the impact of incomes policy: the Italian experience

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  • Francesco Pastore

Abstract

Purpose - The Saint Valentine's Decree (1984) and the ensuing hard-fought referendum (1985), which reduced the automatisms of Design/methodology/approach - After testing for unit root each component by using the ADF, Phillips and Perron, DF-GLS and Zivot and Andrews statistics, the paper tests for co-integration the so-called WPYE model using different methods. The Engle and Granger approach is used to assess the impact of incomes policy on the speed of adjustment of real wages, productivity (and unemployment) to their equilibrium value, while the Gregory and Hansen procedure serves as a means to endogenously detect the presence of a regime shift. The paper estimates coefficients before and after the structural break. Findings - Incomes policy based on the 1993 Protocol has caused a regime shift in the process of wage determination. The long-run estimates of the WPYE model do not generate stationary residuals except when a dummy for 1993 is added. The share of wages over GDP reduces by about ten percentage points in the early 1990s and has stood at about 57 per cent since 1995. The link with productivity is close to one-to-one only before the break. The feedback mechanism, as measured by the coefficient of lagged residuals in short-run estimates, is increased from -0.46 in the pre-reform to -0.79 in the post-reform period, suggesting that incomes policy has increased real wage flexibility indeed. In recent years the link between real wages and (very low) labour productivity growth has weakened. In a sense, incomes policy has introduced a new form of (upward) wage rigidity. Last but not least, incomes policy has changed the correlation with the unemployment rate from positive to not statistically significant. Research limitations/implications - Future developments will focus on disentangling the impact of incomes policy Practical implications - The analysis calls for a careful revision of the 1993 Protocol aimed at better protecting the purchasing power of real wages without losing control on inflation, and introducing growth-generating mechanisms. Originality/value - The paper studies the impact of incomes policy on WPYE and the Phillips curve by means of co-integration and structural break analysis. It proposes to interpret the effect of incomes policy on the Phillips curve as changing the coefficient of the error correction mechanism that leads real wages to their long-run equilibrium value.

Suggested Citation

  • Francesco Pastore, 2010. "Assessing the impact of incomes policy: the Italian experience," International Journal of Manpower, Emerald Group Publishing, vol. 31(7), pages 793-817, October.
  • Handle: RePEc:eme:ijmpps:v:31:y:2010:i:7:p:793-817
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Alberto Bagnai & Christian Alexander Mongeau Ospina, 2014. "The a/simmetrie annual macroeconometric model of the Italian economy: structure and properties," a/ Working Papers Series 1405, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
    2. Leonello Tronti, 2010. "The Italian productivity slow-down: the role of the bargaining model," International Journal of Manpower, Emerald Group Publishing, vol. 31(7), pages 770-792, October.
    3. Francesco Pastore, 2015. "The European Youth Guarantee: labor market context, conditions and opportunities in Italy," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-22, December.
    4. Pastore, Francesco, 2017. "Why So Slow? The School-to-Work Transition in Italy," IZA Discussion Papers 10767, Institute for the Study of Labor (IZA).
    5. Bruno Chiarini & Paolo Piselli, 2012. "Equilibrium earning premium and pension schemes: The long-run macroeconomic effects of the union," Discussion Papers 2_2012, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    6. F. Pastore, 2015. "The Mezzogiorno and Crisis after Market and State Failures. A Review of Economic Literature," Rivista economica del Mezzogiorno, Società editrice il Mulino, issue 3-4, pages 525-582.
    7. Chiara Mussida & Dario Sciulli, 2016. "The trend over time of labour market opportunities for young people in Italy," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(2), pages 291-321, August.

    More about this item

    Keywords

    Economic theory; Keynesian economics; Industrial relations; Incomes policy; Pay bargaining;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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