Alternative theories of wage determination : the case of Italy

This thesis is an empirical study of wage determination mechanisms in the context of the Italian economy. The research presented here addresses a number of issues concerning theories of wage determination, and investigates their relevance for a better understanding of the functioning of labour markets. In particular, the thesis intends to evaluate the adequacy of traditional competitive theory for the explanation of several labour market phenomena. The approach adopted uses econometric techniques and micro-data (at the individual level) to investigate the determinants of pay levels and the structure of wages in Italian manufacturing industry. The vast literature on wage determination of the post-war era extensively documented the existence of large and persistent wage differentials among industries and workers of comparable skills. The empirical evidence analysed in this work suggests that the structure of relative industry wages is very stable over-time. The results obtained provide no evidence in support of the view that wage dispersion can be explained by either unmeasured workers characteristics or compensating wage differentials. Conversely, the pattern of industry-occupation wage differentials seems to suggest that rent sharing mechanisms and fairness considerations are important determinants of wage levels. A significant wage dispersion was also detected among firms operating in the same sector. Firm size, product market conditions and firm's financial structure, through their effect on ability-to-pay, proved to be central features of firms' pay policies. Firm's profitability, in contrast with the view commonly held, showed a positive impact on wage levels. A common finding of empirical studies on wages is that women are paid less than comparable male workers. Our findings for the Italian economy indicate that, although male/female pay differences - on average - are not large in magnitude, nevertheless women tend to be segregated in low pay jobs with poor advancement prospects. In Italy, wage formation is characterised by a two-stage procedure. In the first stage, negotiation between trade unions and employers set a wage level which can be subsequently modified, in the second stage, by overpayments at the firm level. This second stage originates the so called "wage drift". The analysis in this thesis considers the empirical relevance of wage drift, in pay setting mechanisms, for productivity and bargained wage levels. A positive effect of overpayments on productivity was detected and an efficiency wage interpretation is offered. Finns' discretionary payments were shown to be shaped so as to reduce shirking, increase effort and retain high quality workers. Finally, if labour relationships are characterised by long term employer- employee attachment then the traditional "spot” labour market characterisation does not appear well suited to explain job tenure. A "career" labour market interpretation, where internal rather than external mobility is important, can provide a better framework of analysis. The analysis of the determinants of job duration showed that: high educational attainments, work experience and firm size - ceteris paribus - have a negative impact on the probability of job separation.