Economic Growth and Income Inequality

In the period just after the Second World War, Italy experienced an increase in labour productivity bigger than the increase in real wages. The recurrent explanations of this phenomenon build on the weakness of labour trade unions due to a large “reserve industrial army”. With the passing of time, such “army” should have been reduced, and there should have been a progressive growth of the bargaining power of labour trade unions. However, the empirical evidence shows that the strength of labour trade union (measured, at least, as number of members) decreased for all the 1950s. Notwithstanding, the gap between productivity and real wage growth tend to close. This paper tries to explain this process focussing, instead on the labour supply side, on the labour demand side, in particular on the evolution of the bargaining power of the industrial firm trade union, Confindustria. In effect, in the 1950s, Confindustria was a compact union, which represented almost exclusively the few big industries present in the country. With the entry of Italy in the European Economic Community and the following period of high exports and growth, the number of firms members of Confindustria increased significantly. Given the increasing disparity of interests of members, the compactness of Confindustria broke up; its bargaining power decreased. Based on this ascertainment, the paper explains the increase in real wages recorded in the 1950s with the decrease in the firms’ monopsony power. Such explanation is done using a neoclassical growth model with intra-industry trade and monopsony in the labour market. The model offers two results. First, an increase in the steady state capital stock, due for example to trade liberalization, leads to an increase in the labour share of income. Second, the effect of growth on the income labour share is higher at the early stage of development.