AIEL Series in Labour Economics

AIEL Series in Labour Economics

AIEL Series in Labour Economics Published Volumes: F. E. Caroleo, S. Destefanis (Eds.) The European Labour Market 2006. ISBN 978-3-7980-1679-2

Nicola Acocella Riccardo Leoni (Editors) Social Pacts, Employment and Growth AReappraisalof Ezio Tarantelli s Thought With 41 Figures and 33 Tables Physica-Verlag ASpringerCompany

Professor Nicola Acocella University of Rome La Sapienza Department of Public Economics Via Castro Laurenziano 9 00161 Roma Italy nicola.acocella@uniroma1.it Professor Riccardo Leoni University of Bergamo Department of Economics ViadeiCaniana2 24128 Bergamo Italy leoni@unibg.it Library of Congress Control Number: 2006938911 ISSN 1863-916X ISBN 978-3-7908-1915-1 Physica-Verlag Heidelberg New York This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Physica-Verlag. Violations are liable to prosecution under the German Copyright Law. Physica-Verlag is part of Springer Science+Business Media springer.com Physica-Verlag Heidelberg 2007 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Production: LE-TEXJelonek, Schmidt &Vöckler GbR, Leipzig Cover-design: Erich Kirchner, Heidelberg SPIN 11916178 88/3100YL - 5 4 3 2 1 0 Printed on acid-free paper

Preface I still feel deeply moved, many years after Ezio Tarantelli s tragic death, as I dedicate these words to the works of a man who was a valued and sadly-missed aide of mine during my years with the Bank of Italy. From 1966, when he passed the Bank of Italy examination, to 1973 when he left the Bank s Research Department to devote himself to research and university teaching, and still later when he became an external consultant with the Bank of Italy, Ezio Tarantelli was appreciated by all for his gifts of analysis, reflection and initiative. His interest mainly focused on the real economy as shown in the texts collected here. His contribution to the issues involved, from production to prices and income distribution, was fundamental to the debate within and even more outside the Bank on finding a balance between growth, price stability and social equity. In the Eighties Tarantelli devised a model of concertation, or close consultations between employers and unions aimed at breaking out of the perverse wage prices inflationary spiral. He was a strong advocate of that model and he made it known at large. That, perhaps, was the real reason for his murder. The force of his ideas brought about a gradual change which, in 1992 93, led to the signature of an agreement between the Government, employers and unions which had a decisive role in halting inflation. As I had occasion to recall at the inauguration of the University of Calabria s Library, which is named after him, that agreement never had a name. But were it to have one, it should by rights be Ezio Tarantelli s. January, 2006 Carlo Azeglio Ciampi President of the Italian Republic

Contents Preface... v Carlo Azeglio Ciampi Introduction... 1 Nicola Acocella and Riccardo Leoni 1. The role of labour economics and social pacts in Tarantelli s thought... 1 2. The implementation of Tarantelli s proposals... 2 3. The history of social pacts and social pacts in Europe... 3 4. The significance of industrial relations for macroeconomic performance... 4 5. For a theory of social pacts... 4 6. Alternative solutions to conflicts and sources of a better macro performance in Europe... 5 7. New contents for a social pact in the age of the knowledge economy... 6 Acknowledgements... 9 References... 10 PART I: SOCIAL PACTS IN TARANTELLI S THOUGHT 1 Doing good. Ezio Tarantelli s Approach to Political Economy... 15 Pierluigi Ciocca 1.1 Beyond monetarism: the role of institutions in shaping economic policies... 15 1.2 The theory at work. The reform of wage indexation... 17 1.3 Did it work?... 18 1.4 An interpretation of the disinflation process in the longer term (1980 1998)... 19 1.5 Doing good... 21 References... 22 2 The 1960s and Ezio s Awakening to the Social Problems of Italy... 23 Mario Sarcinelli 2.1 Some biographical notes... 23 2.2 The demand for a policy of structural reforms... 24

viii Contents 2.3 The demand for a policy of empowerment...26 2.4 A final roundup...27 References...28 PART II: THE IMPLEMENTATION OF TARANTELLI S PROPOSALS 3 Employment Growth in Italy in the 1990s: Institutional Arrangements and Market Forces...31 Andrea Brandolini, Piero Casadio, Piero Cipollone, Marco Magnani, Alfonso Rosolia and Roberto Torrini 3.1 Introduction...31 3.2 The legacy of Ezio Tarantelli...33 3.3 The labour market in the 1990s...35 3.4 Wage moderation and flexibility...43 3.5 The burden of flexibility...57 3.6 Epilogue: back to Tarantelli...61 References...63 4 The July Protocol and Economic Growth: The Chance Missed...69 Leonello Tronti 4.1 The big chance...69 4.2 Income distribution to factors and wage growth...71 4.3 Wage moderation and competitiveness...76 4.4 High profits, booming employment, low investments: how to lose competitiveness...81 4.5 Growthless employment...83 4.6 Productivity, innovation and relational goods...86 4.7 The weakening of social pacts...89 4.8 Incomes policy and zero growth: starting over?...92 References...94 5 The 93 July Agreement in Italy: Bargaining Power, Efficiency Wages or Both?...97 Annalisa Cristini and Riccardo Leoni 5.1 Introduction...97 5.2 A model of decentralised bargaining and efficiency wages...98 5.3 Empirical model, methodological issues and data...101 5.4 Results...104 5.5 Conclusions...115 Appendix...116 References...118

Contents ix PART III: SOCIAL PACTS IN EUROPE 6 Wage Bargaining Institutions in Europe. A Happy Marriage or Preparing for Divorce?... 123 Jelle Visser 6.1 Introduction... 123 6.2 Tarantelli s first-best and second-best approach... 125 6.3 Wage bargaining institutions... 129 6.4 Wage bargaining institutions in Europe: how stable are they?... 147 References... 152 PART IV: INDUSTRIAL RELATIONS AND MACROECONOMIC PERFORMANCE 7 Wage Setting Institutions and Economic Performance... 159 Carlo Dell Aringa 7.1 Introduction... 159 7.2 First question: what is the relation between industrial relations and macroeconomic performance?... 159 7.3 Second question: why is collective bargaining becoming decentralised?... 165 References... 172 8 Loops Learning and the Phillips Curve... 175 Piero Ferri 8.1 Introduction... 175 8.2 Tarantelli s framework... 177 8.3 The supply equation and the labour market... 178 8.4 Closing the model... 180 8.5 The steady state values of the model... 182 8.6 Simulating the dynamics... 183 8.7 Bounded rationality and the learning process... 186 8.8 A more complex dynamics... 188 8.9 Concluding remarks... 190 Appendix... 191 References... 193 9 Wage Inequality in Europe: the Role of Labour Market and Redistributive Institutions... 195 Elisabetta Croci Angelini and Francesco Farina 9.1 Introduction... 195 9.2 Employment rates and wage inequality in Europe... 196 9.3 A view on labour market regulation and redistributive institutions in Europe... 200 9.4 Heterogeneity across redistributive systems... 201 9.5 Redistribution and wage inequality... 205

x Contents 9.6 Wage inequality in Europe: a regression model with the LIS database...207 9.7 Wage inequality in Europe: a regression model with the ECHP database...212 9.8 Conclusions...215 References...216 PART V: FOR A THEORY OF SOCIAL PACTS 10 Searching for the EU Social Dialogue Model...221 Richard B. Freeman 10.1 Introduction...221 10.2 The two economic systems...223 10.3 The social dialogue model and efficient bargaining...226 10.4 Laboratory experiments and behavioral economics...230 10.5 Game theory and institutional design...233 10.6 Conclusion...236 References...236 11 From First- to Second-Generation Social Pacts...239 Nicola Acocella, Giovanni Di Bartolomeo and Patrizio Tirelli 11.1 Introduction...239 11.2 Types of social pacts...240 11.3 The model...242 11.4 The non-cooperative solution...243 11.5 The cooperative solution...244 11.6 Concluding remarks...248 References...249 PART VI: ALTERNATIVE SOLUTIONS TO CONFLICTS 12 Inflation Inertia, Monetary Policy and Market Competition: Tarantelli Revisited...255 Fabrizio Coricelli 12.1 Introduction...255 12.2 Product and labour market imperfections...257 12.3 Degree of competition, policy accommodation and dynamics: a simple example...259 12.4 Optimal interest rate rule and the link between central bank conservatism and market competition...262 12.5 Concluding remarks...263 Appendix A.1 Simulation of a simple monetary rule...264 Appendix A.2 An optimizing model of staggered prices...265 Appendix A.3 Optimal policy...269 References...272

Contents xi 13 Creating the Neo-Lisbon Economy... 273 Robert M. Lindley 13.1 Introduction... 273 13.2 Stability and the path to growth The UK... 274 13.3 Trends towards higher skill requirements... 277 13.4 The knowledge-based scenario... 278 13.5 Investment in human capital and mobility... 280 13.6 Organisational design The missing policy discourse?... 283 13.7 Concluding reflections... 285 References... 286 List of Contributors... 289