(AGENPARL) – lun 18 settembre 2023 Welcome address
Deputy Governor of the Bank of Italy
6th Bank of Italy-CEPR workshop on labour market policies and institutions
Rome, 18 September 2023
Ladies and gentlemen, distinguished guests and colleagues,
I welcome you all today to the sixth edition of the workshop on labour market policies
and institutions that marks another important building block in the long-lasting and
fruitful cooperation between the Bank of Italy and the CEPR. The varied programme,
which includes many excellent papers and brings together both well-established and
younger labour economists, provides the perfect springboard to comment on the current
economic situation and the pivotal role of the labour market.
We are in the midst of uncertain times. The strong post-pandemic employment growth
may soon come to an end, following the recent slowdown in economic activity in the
euro area. Inflationary pressures, largely generated by the growth in commodity and
intermediate goods prices and by shocks to global value chains, might have reached
their peak in the past few months, but there are upside risks to their persistence. Despite
strong demand for significant wage increases in certain countries, especially those with
tight labour markets, overall wage growth has remained relatively modest up to this point,
and real wages are still well below pre-pandemic levels. Restoring the lost purchasing
power should be tied to achieving productivity growth.
Uncertainty is not only about the short-term outlook. We are facing long-term structural
shifts that will affect the functioning of the labour markets and the wellbeing of workers
and households in the near future.
The transition to a net zero emissions economy, automation, robotics and generative
artificial intelligence will affect labour demand and its composition, with potentially
significant effects on inequality. An ageing population will exert significant pressure
on labour market participation in all advanced economies and will place a substantial
burden on the sustainability of public finances due to fewer taxpayers and escalating
old-age-related expenditures. The global context is also changing: the rise of new,
competing, geopolitical blocs may trigger a process of deglobalization.
In times of both short and long-term shocks, we need to make sure we balance the
imperatives of economic dynamism with the need to address inequalities and protect
vulnerable workers. This is where studying labour market institutions and understanding
how to tailor the policy tools at our disposal becomes so important. Let me pick out
some issues among those that will be discussed in the workshop.
We have recently witnessed the pivotal role that the design of wage negotiation systems
plays in shaping wage dynamics. Especially in the euro area, many aspects of the
country-specific wage bargaining systems – such as the duration of wage agreements –
induce (nominal) wage rigidities and the delayed response of wages to business cycle
conditions. There is long-standing debate on whether and how to introduce greater
flexibility into wage negotiations, for example by granting certain firms the possibility
to deviate from national collective agreements. This would strengthen firms’ resilience
to shocks, albeit at the cost of potentially lower wages, highlighting the importance of
protecting workers’ welfare.
Institutions also play a crucial role in shaping the redistribution to workers of the economic
rents accruing to firms as a result of their monopsonistic power in the labour market.
Firms might actually pay inefficiently low wages, or exert their power by only offering
temporary and short-time contracts. Since the groundbreaking work of Nobel laureate
David Card and his friend and co-author Alan Kruger, whom we miss very much, research
has suggested that minimum wage policies can contribute to rebalancing the share of
economic rents in favour of workers, and can trigger a favourable reallocation process,
penalizing firms operating with monopsonistic inefficiencies.
Policies that encourage firms to offer permanent and full-time contracts can serve as a
safeguard for protecting workers. On the other hand, although the effect on aggregate
employment is undetermined ex ante, these measures might lead to a decrease in
employment levels within some firms. Meticulously designing policies to fit individual
economic contexts is necessary. Once again, this means there is a great need for further
research to inform policymakers on this topic.
Welfare programmes are key for shielding workers and households from the negative
effects of both temporary shocks and structural transitions. Government interventions have
played a crucial role in safeguarding households and workers in the wake of the COVID-19
pandemic and during the recent inflationary pressures that have hit low-income households
harder. Nevertheless, designing such comprehensive programmes is no mean feat, in a
world that is considerably different from the post-World War II era when the foundations
of the modern welfare states were laid. Striking the right balance between incentivizing
labour participation, providing a safety net against negative shocks and complying with
budgetary rules requires thorough and realistic modelling frameworks, some of which will
be discussed tomorrow by Professor Voena, one of the keynote speakers.
There is little doubt that the long-term transformation of our economic systems will
depend on technological progress, and the way it unfolds. Among the many challenges
ahead of us, the recent advances in automation and digitalization will undoubtedly have
an unprecedented impact on workers’ prospects, overall welfare and inequality. In the
past, labour market and political institutions were crucial in sharing the productivity gains
among capital and labour, especially from post-World War II to the early 1970s. More
recently, automation has generated losers, especially among those whose productivity
has not been enhanced by the interaction between technology and their skills. Looking
ahead, the impact of AI on workers’ employment prospects may be different from what
we have observed in the recent past, and even highly skilled workers may experience
negative labour market outcomes. These concerns will be at the heart of Professor
Acemoglu’s keynote lecture today.
I am not here to take a stance on all these issues, or more generally on the future of work.
The real consequences of this new technological wave, however, are likely to challenge
several aspects, not only of the labour market – such as the determination of wages and
the rent-sharing between firms and workers – but also of the modern welfare state –
such as unemployment insurance schemes. Brand new policies and institutions will be
key in fostering competition, in favouring a smooth transition and in enhancing inclusive
growth; minimum income schemes and training and lifelong learning programmes could
be useful in supporting those workers most at risk of being displaced.
The path ahead of us is not set in stone. Actively investigating these policy tools and
questioning received wisdom is of the utmost importance today. For young (and less
young) researchers, like many of you here today, the challenge is to provide strong
empirical and theoretical evidence to support and guide the upcoming policy decisions.
For those who are in charge of implementing these policies, a closer look at the recent
advancements in economics and social sciences would be beneficial.
Let me conclude by thanking the organizers for their hard work, the keynote speakers and
the presenters for their valuable contributions, and each one of you for your presence
here. I am sure there will be two very fruitful days of discussion for us all.
Designed by the Printing and Publishing Division of the Bank of Italy
(AGENPARL) – lun 18 settembre 2023 Welcome address