Income distribution developments since the 1993 incomes policy agreement

Trentini, Marco

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Income distribution developments since the 1993 incomes policy agreement

Published: 27 September 2001

According to recent research, Italy's national tripartite incomes policy agreement of 23 July 1993 has helped to protect the purchasing power of wages, although the 1990s were a decade of pay restraint. However, it appears in autumn 20002 that the re-emergence of inflation and the disparity between the growth of productivity and of wages may reopen conflict on income redistribution.

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According to recent research, Italy's national tripartite incomes policy agreement of 23 July 1993 has helped to protect the purchasing power of wages, although the 1990s were a decade of pay restraint. However, it appears in autumn 20002 that the re-emergence of inflation and the disparity between the growth of productivity and of wages may reopen conflict on income redistribution.

The tripartite national intersectoral agreement of 23 July 1993 laid down the basis for Italy's current incomes policy and two-tier (national/sectoral and company/local) bargaining system (IT9803223F). The agreement is still a topic of great interest in Italy, not only among the social partners but also among industrial relations researchers and economists. An earlier EIRO feature (IT9806326F) analysed the impact of the agreement on pay levels in Italy up until 1997. Now a new study has examined the trend in income distribution in Italy between 1993 and 2001.

The study from the Institute of Economic and Social Research (Istituto di Recherche Economiche e Sociali, Ires), the research institute of the General Confederation of Italian Workers (Confederazione Generale Italiana del Lavoro, Cgil), carried out by Lorenzo Birindelli and Giuseppe D'Aloia, is entitled 'Pay, productivity and income distribution before and after 1993' ('Retribuzioni, produttività e distribuzione del reditto prima e dopo il 1993'). The distinctive feature of the study is that it analyses wage dynamics in relation to the macroeconomic situation. It is divided into two parts: the first concentrates exclusively on Italy and is based on an analysis of data from the National Institute of Statistics (Istituto Nazionale di Statistica, Istat) on pay levels and other macroeconomic indicators; and the second compares Italy with the main European countries on the basis of Eurostat, Organisation for Economic Cooperation and Development (OECD) and Bank of Italy data, a feature which makes the comparison particularly complex.

Wage restraint and income distribution

The Ires study confirms that the July 1993 agreement has contributed to wage restraint. More specifically, according to the Ires researchers, it is possible to identify three phases during the period between the second half of the 1970s and 2000:

the first lasted from 1975 to 1982 and was characterised by high inflation, strong economic growth and an egalitarian distribution of income made possible by the wage indexation system (the scala mobileor sliding-scale mechanism);
the second lasted from 1983 to 1990 and was distinguished by mounting public debt and the progressive widening of pay differentials between productive sectors; and
the third lasted from 1993 and 2000 and was marked by the rebalancing of the budget, a strong growth in exports, the curbing of inflation, and wage restraint.

Tables 1 and 2 below show the annual percentage changes in real contractual wages and a variety of economic indicators over the 1976 to 2000 period.

**Table 1. Trends in real contractual wages, 1976-2000. Average annual % changes (adjusted for blue- and white-collar household deflator)**
.	1976-82	1983-92	1993-2000	1976-2000
Total economy	2.3	0.7	-0.3	0.6
Industry (strict definition)	2.5	0.5	0.0	0.5

Source: Ires calculations based on Istat data.

**Table 2. Average annual % changes in selected indicators, 1976-2000**
.	1976-82	1983-92	1993-2000	1996-2000	1999	2000
GDP at 1995 prices	3.3	2.3	1.7	1.9	1.6	2.9
Public debt (stock)	22.6	16.7	5.3	2.1	1.7	1.4
Productivity	2.2	1.8	1.7	1.1	0.8	1.4
Productivity-wages differential*	0.0	1.0	1.5	0.5	0.0	0.6
Dependent employment	0.6	0.5	0.2	1.0	1.3	1.5
Total employment	1.0	0.6	0.0	0.8	0.8	1.5

* Pay levels deflated with the same deflator as production (GDP deflator).

Source: Ires calculations based on Istat and Bankitalia data.

At the same time as ensuring wage restraint, however, the 1993 agreement made it possible to protect the purchasing power of wages, states the report. Or at least it did so until 2000, when the resumption of inflation widened the gap between the real inflation rate and planned inflation rate, on the basis of which wage increases have been fixed by sector-level collective bargaining since the 1993 agreement. Therefore, according to Ires, at least for 2000 and 2001 one may expect wages to lose some of their purchasing power.

Considering wage trends by sector - see table 3 below - the pay differential between the manufacturing sector and protected sectors such as the public services and the public utilities (electricity, gas, water) has tended to diminish. However, the sector nevertheless seems to play an important role in differentiating among wage dynamics.

**Table 3. Average annual % real contractual wage growth by sector, 1976-2000**
.	1983-87	1988-92	1993-5	1996-9	2000
Agriculture	1.0	0.6	-2.0	-0.2	-2.4
Manufacturing	0.3	0.6	-0.9	0.8	-0.5
Electricity, gas, water	0.8	1.4	-0.2	0.0	-2.4
Construction	0.0	1.7	-1.9	0.7	0.3
Commerce, retail, hotels	0.7	0.7	-0.7	1.2	-0.6
Transport	-1.2	1.2	-1.8	0.0	-2.1
Post and telecommunications	-0.8	0.5	-1.4	0.6	-2.4
Credit and insurance	1.4	0.5	-1.2	0.1	-0.9
Public administration	0.6	2.1	-3.3	1.4	-0.2

Source: Ires calculations based on Istat data.

Although the rate of productivity growth has tended to decrease, productivity (in industry) has grown more rapidly than pay: the differential between productivity and pay was particular wide until 1995, thereafter it increased more slowly.

Taking account of the GDP growth trend, the Ires study suggests that wage restraint helped to ensure the stability of employment during the first half of the 1990s and subsequently contributed to its growth. This feature differentiates Italy from other European countries like France and Germany, where employment has tended to fall.

As regards business profitability, the Ires study used Mediobanca data on a sample of around 2,000 medium to large companies. Analysis of these data shows that business profitability tended to increase in the 1990s and was particularly high in 1998 and 1999, a trend which can be explained by modest increases in the cost of labour, increased exports, a fall in interest rates and, especially in the last years of the decade, effective financial management.

Commentary

The Ires study confirms the positive contribution made by the agreement of 23 July 1993 to the rebalancing of Italy's national budget, which was required by moves towards European monetary union. Moreover, although the 1990s were a decade of pay restraint, the purchasing power of wages was protected.

The picture seems set to change at the beginning of 2001. First, the resumption of inflation, especially if its proves to be long-lasting, will alter the economic context. As has become evident during the negotiations over national collective agreement renewals in 2001, the problem is closing the gap between planned and real inflation (IT0107193F). Not coincidentally, one of the most controversial issues raised by the economic and financial plan approved by the new centre-right government at the end of July 2001 (IT0109302F) is the fixing of the planned inflation rate, given the differing estimates submitted by the employers' associations and trade unions.

Another crucial question is the disparity between the growth of productivity and of wages, which may reopen conflict on income redistribution. (Marco Trentini, Ires Lombardia)

Eurofound recommends citing this publication in the following way.

Eurofound (2001), Income distribution developments since the 1993 incomes policy agreement, article.