Wages and competencies. An Econometric Investigation in the Italian manufacturing industry

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1. Introduction 
 
Italy and some other European countries are facing a long and painful economic crisis. 
Several reasons have been attributed to the actual situation: the global economic 
slowdown and the massive public debt are among the most accredited. And Italian 
policy makers focus their attention on structural inefficiencies to overcome the crisis, 
such as poor competition on the market. Particular attention is regarded to the labour 
market, often ascribed to be the source of all evil. Rigidities on the labour market are 
considered to seriously weaken the Italian competitive strength. Opinions of the 
common man usually neglect the impact of several reforms that from the late nineties 
have gradually made more flexible the Italian labour market (OECD 2004). And they 
also ignore that the employment protection legislation in Italy is lower than the one of 
Germany (OECD 2012). So that attention is often diverted from the most stringent 
problems.  
Some Italian structural negative externalities cannot be denied: poor infrastructures, 
high taxation, heavy bureaucracy, bribery, inefficient judicial system and weak 
institutions. Also the labour market requires some reforms, but greater attention should 
be granted to productivity, rather than to labour market flexibility. Indeed Italian 
productivity is low compared with the one of its main competitors, and stationary if not 
decreasing (OECD 2012). And Italian poor performance in terms of productivity is not 
due to low working time; conversely OECD (2012) statistics reveals that Italians work 
370 hours more than Germans every year on average. Thus economic policies should be 
directed to increase the efficiency of every single worked hour, even though it is worth 
noting that productivity gains are likely not to stem from higher capital intensity, but 
from a more efficient human resource management. And also income policies should 
focus their attention primarily to the role of productivity. Wages are critical for 
workers’ motivation, for the learning of new competencies, and consequently for labour 
productivity.  
Wages are a very powerful transmission mechanism that affects levels of 
unemployment, consumption and inflation. And they deeply influence also the balance 
between equity and efficiency within the economy.  Thus wage-setting systems should
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be studied considering their impact on the overall economic system. Moreover Solow 
(1990) argues that the functioning of the labour market relies on what is considered 
mutually acceptable by both employers and employees. Therefore also the historical 
process and power relations must be considered when income regulations are reformed. 
Both macro and micro issues must be studied with great thoroughness.  
Wages are strongly intertwined with productivity, and within advanced economies 
workers’ competencies are one of the most important productivity drivers. However it is 
not clear which are the most productive competencies, and which are the ones 
appreciated and paid within the labour market. The international debate regarding the 
role of ICT competencies on wages is particularly lively. In Italy not many scholars 
investigated the role of competencies on wages, even if economic policies should 
increasingly look at this issue. Indeed social costs connected with inefficient wage-
setting systems are significant. And also misleading educational and training efforts 
might undermine Italian competitiveness.  
Even though many productivity gains are potentially obtainable on the labour market, 
the historical and social context must be considered dealing with prospective reforms. 
Theoretical suggestions must be contextualized within the peculiar Italian labour market 
and within the era of the so-called ‘new economy’. Otherwise the risk is that utopian 
theoretical formalizations cannot be achieved in practice. Thus balances of power at 
micro level must be identified, highlighted and considered.  
The purpose of this thesis is to investigate the role of competencies on Italian wages, 
and particular attention is regarded to the manufacturing sector. The thesis argues that 
new forms of wage-setting systems are desirable within the most advanced economies, 
and particularly in Italy remuneration should be increasingly aimed at obtaining 
productivity gains. Therefore Italian wage determinants are studied in the attempt to 
develop further understanding regarding which are the most productive competencies.  
The second chapter discusses the role of wages within the economic system with special 
attention to its implications within the ‘new economy’. The third chapter illustrates the 
international debate on the relationship between wages and competencies, and on some 
wage determinants; moreover it highlights some specificities of the Italian labour 
market. The fourth chapter provides empirical evidence regarding the link between
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wages and competencies in the Italian manufacturing sector and it discusses the main 
findings. Finally, the fifth chapter concludes.
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2. Economic policy and wage-setting systems in the ‘new economy’ 
 
2.1 Introduction 
 
Economic policies must be assessed according to their impact on the overall economy. 
The labour, financial and goods market are all strongly intertwined, and interventions 
on one of them must consider the impact also on the other two. Also within the labour 
market, changes on the wage-setting system have side effects on unemployment, 
productivity, inflation rate and consumption level. Thus equity and efficiency should be 
evaluated in all their dimensions to improve people’s welfare. This chapter highlights 
some of the main problems the Italian labour market is facing, and it compares them 
with the ones of its main competitors (namely France, Germany and Spain). Theories 
and empirical data are specially intertwined in the attempt to explain complex 
phenomena, and some constructive and applicable advices are provided. 
The purpose of this chapter is to assess the impact of wage-setting systems on the 
overall economy, and to discuss suitable solutions according to the international 
literature. This chapter argues that moving from Taylor-Fordistic companies towards the 
most innovative organizational forms would allow beneficial outcomes at aggregated 
level. The research question addresses the problem of reforms of wage-setting systems 
according to the evolution of the most advanced economies after the ICT revolution.  
The first paragraph stresses the importance of wages within the economic system. 
Wages are strongly intertwined with many other economic variables, and they can 
deeply affect economic efficiency and equity. It argues that transmission and adjustment 
mechanisms are not hydraulic, and productivity should arouse higher concern. Increased 
productivity might trigger virtuous outcomes on unemployment and consumption, 
without affecting inflation. The challenge is to obtain productivity gains.  
The second paragraph looks into the company’s black box. It is likely that greater 
understanding of firms’ functioning allows developing further knowledge regarding 
how entire economies run. In particular ICT adoption and its complementarity with 
organizational innovation are found to be the most important drivers of the ‘new 
economy’.
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The third paragraph discusses the main wage parameters. It argues that input-based 
wage-setting systems, together with other innovative workplace practices, are the most 
desirable within the actual economic situation.  
The fourth paragraph deals with some economic policy implications, and it investigates 
the impact of competency-based wage-setting systems on productivity, equity, 
consumption, unemployment, occupability, education and inflation. 
The fifth paragraph considers the mechanism of power underlying the determination of 
wages. It argues that employees and employers’ interests can easily converge through 
input-based remuneration systems. Perspectives of both the workforce and managers are 
inquired, and firms are viewed as centres of converging interests between workers and 
the ownership. 
Problems are investigated with both a macro and micro perspective. In this manner, 
problems are firstly highlighted within their systemic dimension, and solutions are then 
discussed according to their applicability. Theories unable to deal with the actual 
economic complexity are considered not worthy to be highlighted.  
 
2.2 The importance of wages, a systemic view 
 
2.2.1 Wages within the macroeconomic system 
 
The economic functioning relies on three main markets: the product and service market, 
the financial market and the labour market. Even though these markets are intertwined, 
economists often focus their research efforts just on one of them. Indeed each market 
requires specific knowledge and understanding. In the eighties, mainstream economists 
and policy makers identified liberalization and free competition as the most important 
drivers of capitalism. Today this idea has been challenged by the recent financial crisis 
and the emergence of social responsibility. So that also economic policy cannot be 
confined to mere deregulation any more. The role of the government on the product and 
service market is not only to provide public goods, but also to drive virtuous behaviours 
in the long run such as the environmental sustainability. The recent financial crisis 
highlights the need of regulations of financial markets able to consider systemic risks.