According to economic theories, productivity rises together with income. Because greater spending is possible with higher income, this relationship occurs. The optimal number of hours worked will depend on one's position in the wage distribution if a person's productivity is influenced by his or her relative position in the wage distribution. People whose wages are declining relative to others may try to enhance their wages by putting in longer hours and being more productive. According to the article, both in absolute numbers and in comparison, to the median salary, “minimum” wages in Italy are considered to be rather high. However, In Italy, there is no statutory minimum wage at the federal, state, or local levels; nevertheless, sectoral wage floors are established by collective bargaining agreements between employers' and labor organizations. This structure dates back to the early 20th century, when the first territorial or company-level collective agreements in manufacturing and agriculture were adopted. The average gross minimum salary under collective agreements in 2015 was 9.41 euros per hour, including the 13th and 14th month (if paid), which is a 17.7% increase from 2008 when it was roughly 8 euros per hour. The hourly minimum wage varied from 7.47 to 13.89 euros. Interesting evidence that the negotiated minima evolved similarly in all sectors comes from the fact that the distance between the lowest minimum and the maximum stayed largely constant over time (1.87 in 2008 vs. 1.85 in 2015). Nevertheless, despite various reforms, Italy's labor market productivity has been flat for the previous ten years. The paper provided a justification for this. Incentives have been largely disregarded in previous labor market changes, which have only focused on flexibility. The Italian labor market suffers from acute allocative dysfunction. In short term, wages did not mirror sector productivity; yet, over time, they increase in sectors where productivity declines. Consequently, the collective bargaining system needs to be completely reformatted. Nonetheless, in contrast to what happened in Germany, the wages have risen in sectors, such as manufacturing, where productivity has decreased in relative terms. To recapitulate, a 1%-point growth in relative productivity in one industry in Italy has little impact on that sector's relative wages. In Italy, a 1 percent increase in a sector's relative productivity over time causes the relative wage to decline by roughly 0.4 percentage points. Additionally, when the relative sectorial productivity increases, Italian employment shares have a tendency to decline by approximately 1:1. Although this "labor misallocation" effect exists in Germany as well, it is four times more obvious there. In neither country are the long-term effects of productivity on labor shares meaningful. To further simplify the data mentioned above, while salaries in Italy tend to upsurge in sectors with declining productivity over the long course, they do not significantly, in the short term, echo sectoral productivity. Finally, Italy's employment tends to shift toward less productive industries. The labor market's "allocation failure" raises concerns about the viability of the established wage-bargaining system. It is clear that Italy, among OECD nations, has experienced the slowest rise in labor productivity between 2000 and 2016. As studied in class, The value of the output generated per unit of labor input, or labor productivity, is a key long-term driver of employees' real earnings. In the end, employees cannot profitably earn more than they generate. However, the relative contributions of the various economic sectors in Italy are unclear. The only industries with a trend toward diminishing labor productivity growth rates are trade, transportation, lodging, and food services, as well as technology and communication. To relate the article to our studies, we can take a look at a simplified world with two sectors, 1 and 2, where businesses manufacture 1 and 2 different items and only use 1 factor of production, labor, which is presumptively homogeneous and fixed in supply. Within each sector, businesses are the same, although there may be differences between them. In both industries, a firm's need for labor declines as the relative wage rises. Additionally, we assume that people hunt for employment in businesses or industries that pay the greatest wages, but that switching between industries takes time because of search frictions and the requirement to learn new, sector-specific skills. To put it into perspective, let's assume that labor costs in Italy are between 40% and 45% of wage, with the employer paying 30% to 35% of the cost and the employee 10%. The business must also pay the employee's severance pay, which is equivalent to an annual wage increase of about one extra month. This approach is significantly different from, say, the German system, where there is no severance compensation required and the labor cost is approximately 40% of the wage, shared equally by the business and the employee. This majorly gives Italy a relative advantage over Germany since the costs beard by the worker are significantly less. References: Manasse, P., Manfredi, T., (2014), “Wages, productivity, and employment in Italy: Tales from a distorted labour market”, VoxEU Center for Economic Policy Research, 19/04/2014, available at: https://cepr.org/voxeu/columns/wages-productivity-and-employment-italy-talesdistorted-labour-market, Accessed on: 27/09/2022.
