Beyond National Institutions: Labor Taxes and Regional Unemployment in Italy

A joint Initiative of Ludwig-Maximilians-Universität and Ifo Institute for Economic Research

Working Papers

January 2001

CESifo

Center for Economic Studies & Ifo Institute for Economic Research Poschingerstr. 5, 81679 Munich, Germany

Tel.: +49 (89) 9224-1410 Fax: +49 (89) 9224-1409 e-mail: office@CESifo.de

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• from the SSRN website: www.SSRN.com

• from the CESifo website: www.CESifo.de

* We are grateful to Fabio Schiantarelli for a useful conversation on the topic of this paper, to Silvia Ardagna for comments and to Peter Pedroni for advice. Part of the research done for this paper was carried out while the first author was visiting Boston University. The usual disclaimer applies.

BEYOND NATIONAL INSTITUTIONS: LABOR

TAXES AND REGIONAL UNEMPLOYMENT

IN ITALY

Giorgio Brunello

Claudio Lupi

Patrizia Ordine

Maria Laura Parisi*

CESifo

Working Paper No. 414

January 2001

BEYOND NATIONAL INSTITUTIONS: LABOR TAXES AND

REGIONAL UNEMPLOYMENT IN ITALY

Abstract

By focusing on the Italian experience, we ask whether the relationship between labor taxes and unemployment varies across regions. In spite of similar national labor market institutions, we show that this relationship is significantly stronger in the highly industrialized North than in the under-developed South, where unemployment is much higher. An important source of variation in the regional responsiveness of unemployment originates from the fact that regional gross wages in the North increase more than in the South in response to a hike in labor taxes. Regional wage setting affects regional employment (and unemployment) both directly and indirectly, via its impact on regional profits and the capital stock.

Keywords: Regional unemployment, labor taxes JEL Classification: J51, H20

Giorgio Brunello University of Padua

Via del Santo 33 35123 Padova Italy e-mail: brunello@decon.unipd.it Claudio Lupi ISAE Roma Italy e-mail: c.lupi@isae.it Patrizia Ordine University of Calabria Cosenza Italy e-mail: p.ordine@unical.it

Maria Laura Parisi University of Padua

Via del Santo 33 35123 Padova

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