Changes in aggregate supply conditions in Italy: A small econometric model and its policy implications

This paper examines aggregate supply conditions in Italy and how they changed from the 1970s to the late 1990s. Based on a VAR model for wages, prices, productivity, unemployment and exchange rate the cointegration properties of the data in nominal and real terms are analysed. Analysis is based on a model directly derived from the work of [Modigliani, F., & Padoa Schioppa, T. (1977). La politica economica in un’economia con salari indicizzati al 100 o più. Moneta e Credito, 117, 3–53]. Our results – giving empirical evidence for the existence of a link between labour market reform, employment and wage flexibilization – provide a major incentive for labour market reforms in Italy. The pressure for reintroducing mechanisms for partial wage purchasing power defence are resolutely discouraged. Normative aspects of ‘concertation’ should be positively reappraised as compared to wage aspects. Other notable policy implications are highlighted in the paper.