Analysis: Why us? Italy seeks way out of low-wage economy trap

By Gavin Jones

ROME (Reuters) – Diana Parini left her waitressing job at an Italian Alpine resort last month because she was fed up with the pay and conditions: eight euros per hour, of which six were paid cash-in-hand with no welfare or pension contributions.

Parini, 44, who has a modern languages degree, went home to Milan to work as a dogsitter.

Millions of others have similar stories in Italy, where much work is unregulated and – uniquely in Europe – wage growth has been stagnant for 30 years.

With consumer prices surging across the euro zone, there are signs wages are also climbing – but not in Italy, the bloc’s third-largest economy.

Negotiated wages in the single-currency area rose 2.8% in the first quarter from a year earlier, driven by a 4% gain in Germany. In Italy they increased just 0.6%.

The pattern is familiar. Organisation for Economic Cooperation and Development (OECD) data on inflation-adjusted wages in 22 European countries shows that between 1990 and 2020, pay rose 6% in Spain and over 200% in the Baltic states.

Italy was the only country where wages fell, registering a 3% decline.

The OECD figures have triggered an anguished debate on “la questione salariale” (the salary issue) – or why Italy is unable to generate stable, well-paid jobs.

The answer, economists say, lies in a vicious circle of underinvestment, especially in education and technology, low productivity and weak economic expansion. And it has deep roots.

“We chose the wrong growth model back in the 1980s,” says Francesco Saraceno, economics professor at Rome’s Luiss University and Sciences-Po in Paris.

“To respond to globalisation we tried to compete with emerging markets by lowering costs instead of following the German example of investing in higher quality production. That meant keeping salaries low.”

Productivity problem

Italy has been the most sluggish of the 19 euro zone economies since the single currency’s launch in 1999. Labour productivity, measured roughly as output per hour worked, has risen just 13% since 1995, according to the Bank of Italy, compared to 44% in Germany.

Behind those figures lies a web of problems that include a rapidly ageing population and a low-skilled workforce.

By joining the euro Italy also lost the quick fix of being able to devalue its currency to maintain competitiveness.

A large shadow economy is part of the picture. Some Italians, especially in the poor south, top up regular jobs with casual work which does not show up in official wage statistics, and is usually even more badly paid.

Parini, a passionate climber, has spent several winters working at Alpine resorts. Like many hospitality sector jobs, they were all paid at least partly “cash-in-hand”.

Reforms since the 1990s have partially deregulated Italy’s labour market, increasing the scope for temporary, low-paid contracts which now account for the majority of new jobs.

In April the number of temporary workers stood above 3.15 million, the highest since 1977.

Tito Boeri, a labour economist at Milan’s Bocconi university, says Italy has a dysfunctional labour market split between protected workers mostly hired before the reforms and low-paid ones without job protection hired afterwards.

“The real problem is that it is very hard for people to pass from temporary to permanent contracts,” he said.

Minimum wage? no thanks

One of just six European Union countries without a statutory minimum wage, Italy has one of the highest proportions of “working poor” on wages below 60% of the average.

Yet when the EU approved a directive last week laying out common rules for minimum wages and tackling labour abuses and in-work poverty, it got a lukewarm reception in Italy.

Many firms, backed by rightist parties, fear higher costs, while trade unions reject any interference in the wage bargaining process and argue that pay could actually fall towards a statutory minimum.

Boeri criticised the union stance as “a question of power”, saying with millions of Italians excluded from collective bargaining, “the current system isn’t working”.

Some employers complain a “citizens’ wage” poverty relief scheme offering about 450 euros per month – roughly 25% of Italy’s average take-home pay – to the unemployed makes it impossible for them to find staff.

“When we are looking for young people to give them a job, we have a big competitor: the citizens’ wage,” says Carlo Bonomi, head of employers lobby Confindustria.

Economics professor Saraceno says this exemplifies Italy’s plight: “It means some companies think 500 euros a month is a good salary, which is absurd.”

To reverse the situation, Saraceno says Italy needs to shift the tax burden from salaries to rents and wealth, while launching a long-term public investment programme.

Some 200 billion euros ($208.36 billion) of EU pandemic recovery funds Rome is due to receive through 2026 is a major opportunity, he said, allowing Italy to adopt reforms while increasing spending, rather than reducing it as in the past.

In the near term, Mario Draghi’s government is studying measures to reduce the so-called tax wedge, the difference between the salary an employer pays and what a worker takes home, officials have told Reuters.

Boeri says Italy’s priority should be reforms to increase service sector competition and improve the civil justice system and state bureaucracy, but he sees little progress.

“Has this government of national unity passed reforms that can allow us to grow significantly? Unfortunately it hasn’t,” he said.

($1 = 0.9599 euros)

(Additional reporting by Emilio Parodi in Milan; Editing by Catherine Evans)