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International Review of Applied
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The labour market and the distribution
of earnings: an empirical analysis for
Italy
Fabio Clementi
a
& Michele Giammatteo
b
a
University of Macerata, Department of Political Science,
Communication and International Relations, Piazza G. Oberdan 3,
62100 Macerata, Italy
b
Bank of Italy, Via Nazionale 91, 00184 Rome, Italy
Published online: 09 Oct 2013.
To cite this article: Fabio Clementi & Michele Giammatteo , International Review of Applied
Economics (2013): The labour market and the distribution of earnings: an empirical analysis for
Italy, International Review of Applied Economics, DOI: 10.1080/02692171.2013.838544
To link to this article: http://dx.doi.org/10.1080/02692171.2013.838544
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The labour market and the distribution of earnings: an empirical
analysis for Italy
Fabio Clementi
a
* and Michele Giammatteo
b
a
University of Macerata, Department of Political Science, Communication and International
Relations, Piazza G. Oberdan 3, 62100 Macerata, Italy;
b
Bank of Italy, Via Nazionale 91,
00184 Rome, Italy
(Received 7 April 2012; final version received 12 August 2013)
Using four waves of data from the Participation Labour Unemployment Survey,
a database of information on the Italian labour market supply, we address
the question of earnings dispersion by applying a ‘nested’ decomposition
procedure of the Theil inequality measure, which combines into a unified
framework the standard decompositions by population subgroups and income
sources. The empirical evidence obtained points to the key role played by the
self-employees in shaping labour income inequality, especially at the upper
extreme of the earnings distribution, and the emergence of non-standard forms
of employment as an important feature of the contemporary workplace.
Keywords: labour income; size distribution; inequality
JEL Classifications: D33, D63
1. Introduction
Since the mid-1990s, and at least up to the onset of the current economic crisis,
labour market outcomes improved substantially in Italy. Between 1995 and 2007,
the most recent year unaffected by the crisis, about 2.5 million jobs were created
(mostly in dependent employment) and almost 3 million people entered the work-
force (Checchi
2014). Spurred by the positive developments in employment and
labour force participation, the unemployment rate declined to around 6% in 2007,
about half its 1995 peak of over 12% (Schindler
2009).
1
However, such improve-
ments were accompanied by poor productivity growth (Lucidi
2007; Codogno 2009;
Lucidi and Kleinknecht
2010) and a structural deterioration of Italy’s competitive-
ness (Barca
2005; Faini and Sapir 2009; Codogno 2009). In particular, starting by
the end of the 1990s, growth in labour productivity has been modest, even negative
in some years, and as a result its level has recently come to be low compared to that
prevailing in the early 1990s and other industrialised countries.
2
At the same time,
the growth of jobs coincided with a modest real wage growth – a yearly increase of
0.7% during 1996–2007 (Checchi
2014).
The trends outlined above coincided with a period of intense reforms entered by
the Italian labour market. Key among them were the reform of the bargaining system
of the early 1990s – which introduced the collective bargaining framework still in
*Corresponding author. Email: fabio.clementi@unimc.it
© 2013 Taylor & Francis
International Review of Applied Economics, 2013
http://dx.doi.org/10.1080/02692171.2013.838544
Downloaded by [Fabio Clementi] at 07:55 10 October 2013
use – and several labour market reforms aimed to increase the employment rate by
means of expansion in labour market flexibility.
The collective bargaining structure laid out in 1993 closed the period of
automatic wage indexation (the so-called Scala mobile) which dated back to the
mid-1970s. The new bargaining arrangements consist of a national-sectoral bargain-
ing level and a second one decentralised at regional or firm level. At the central
(national) level, firms and trade unions define general employment conditions and
act for preservation of the purchasing power of real wages with periodic inflation
compensations. At the local level, firm and unions negotiate possible rents redistri-
bution on the basis of productivity performances with the objective of enhancing
wage flexibility. However, second-level agreements are optional and cannot define
wages lower than the sectoral minimum. This has limited to some extent the use of
decentralised bargaining, especially among small firms characterised by a low degree
of trade unionisation. As a result, annual wage distributions have appeared more
compressed than was expected (see for example Casadio
2003, Checchi and Pagani
2005, and Dell Aringa and Pagani 2007).
3
With regards to the pursuit of labour market efficiency, starting from the end of
the 1990s some legislative measures have been specifically directed at fostering flex-
ibility through an increase of the so-called ‘atypical’ or ‘non-standard’ forms of
employment. More specifically, the measures introduced by the Law 196/1997
(Legge Treu, named after then Labour Minister Tiziano Treu) amplified flexibility by
extending the set of temporary contracts and providing incentives for part-time
work. The Law 30/2003 (Legge Biagi, named after the advisor on labour market
reforms under the 2001–2006 Berlusconi government) further deregulated the use of
temporary agency work
4
and introduced new forms of atypical work such as on-call
jobs, job sharing and occasional work. Moreover, the latter reform has given a great
thrust to the extensive use of collaboration workers – namely, holders of continuous
and coordinated collaboration contracts (Collaborazioni coordinate e continuative, or
Co.co.co) and contracts linked to a specific project (Collaborazioni continuative a
progetto, or Co.co.pro) – who, although formally self-employed, often work as if
they were normal employees.
5
The large adoption (abuse) of such labour relation-
ships benefited of their more profitable compulsory pension contributions with
respect to both standard and fixed-term employment. Furthermore, if on one hand
collaboration works allow employers to save labour costs, on the other hand, being
a real Italian peculiarity, their inclusion in the category of temporary employment
makes the incidence of atypical workers substantially higher in the Italian labour
market than in other European countries (Ballarino et al.
2013).
The changes in institutional framework embraced by the Italian labour market
during the last two decades certainly contributed to the growth in aggregate employ-
ment. However, the crisis has shown that this employment growth has been just a
transitional ‘honeymoon’, growthless job creating effect (Boeri and Garibaldi
2007):
since most of the new positions created were temporary and part-time works, almost
800,000 jobs disappeared in the 2009 crisis (Checchi
2014). Indeed, the number of
workers in temporary work arrangements more than doubled between 1995 and
2007, and part-time employment increased by 65% during that time; permanent and
full-time jobs, instead, grew respectively by only 7% and 9% over the same years
(Schindler
2009).
6
Furthermore, the employment gains since 1995 occurred at the
expense of real wage growth: in fact, a phase of relevant wage moderation took
place since the change of the contractual arrangements, causing real wages to
2 F. Clementi and M. Giammatteo
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increase on average less than labour productivity and leading to a decline of the
labour share on national income (Tronti
2007; Pugliese 2008).
7
Several authors have
also demonstrated how the prolonged period of wage moderation and the increased
flexibility translated into small labour productivity growth, as the reduction of firms’
wage bill makes worthwhile the preservation of low-productive jobs and labour-
intensive productive processes, thereby reducing the incentives for firms to innovate
and their scope for training activities and high quality human resource management
practices (e.g. Lucidi
2007; but see also Stirati 2008, Lucidi and Kleinknecht 2010,
Cappellari et al.
2012, and Cutuli and Guetto 2013).
Under a distributional perspective, while paying out in terms of employment
growth, the increased labour market – mainly achieved through a series of reforms
‘at the margin’ that liberalised the use of temporary contracts but left largely
unchanged the legislation applying to permanent workers – has led to a strong
segmentation of the Italian labour market, where highly protected and well-paid
permanent jobs coexist along with risky and low-paid temporary occupations
(Barbieri and Scherer
2009).
8
This has exacerbated existing earnings inequalities
between standard and non-standard forms of employment:
9
recent econometric
studies have indeed shown the existence of a wage differential between temporary
and regular employees that has been estimated to range between 7% and 25%
(Picchio
2006; Cutuli 2008; Lucidi and Raitano 2009a,b; OECD 2012).
Another major factor of inequality in the Italian labour market is related to work-
ers’ condition as employees and self-employed: Italy’s self-employment rate stands
out among the industrialised countries (Barbieri and Bison
2004) and the role of
self-employment income in explaining the recent Italian inequality trend has been
documented by several studies (see, among others, Torrini
2005, 2006, Quintano
et al.
2006, Rani 2008, Fiorio 2011, and Ballarino et al. 2013). Moreover, the Italian
distribution of labour earnings showed a persistent increasing pattern in top income
shares since the mid-1980s, mainly driven by top wages and self-employment
income (Alvaredo and Pisano
2010). Recently, the OECD (2011, p. 3) stated that in
Italy ‘changes in self-employment income were important drivers of increased earn-
ings inequality: their share in total earned income has increased by 10% since the
mid-1980s, and self-employment income seems more predominant among high earn-
ers, to the contrary of many other OECD countries’.
Drawing from these recent labour market developments, in the present work we
provide new empirical evidence on the distribution of earnings in Italy, focusing in
particular on the inequality consequences of the Italian employment composition as
dominated by a large share of self-employment and recently affected by labour mar-
ket flexibility reforms. In order to avoid using partial measures that only focus on
limited parts of the overall distribution, or average wage differentials arising
between speci fic subpopulations, we apply a ‘nested’ decomposition of the Theil
inequality index by population subgroups and income sources, which allows us to
investigate how much of the dispersion in earnings concentrated in different parts of
the distribution might be accounted for by alternative sources of labour income
(standard, self-employment and atypical). There are indeed many reasons to explore
inequality in different parts of the distribution. For example, the same degree
of inequality can lead to different economic outcomes, depending on whether the
inequality is more pronounced in the lower tail of the distribution or in the top end
(Morris et al.
1994; Voitchovsky 2005). Additionally, using wage differentials ‘at
International Review of Applied Economics 3
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