A simple policy of wage adjustment introduced in Italy in the 1970s designed to help low paid workers and to increase equality ended up damaging the labour market perspectives of low-skilled workers while lowering the wage gains of high-skilled ones. This is the main conclusion of new research by Marco Leonardi, Michele Pellizzari and Domenico Tabasso published in the November 2019 issue of The Economic Journal.

The researchers consider the impact of the Scala Mobile (SM), which was introduced in Italy in 1976 and lasted, with some changes, until 1992. They look at the effects that the mechanism had on employment and wages between 1976-1982, the period of its strictest use.

The SM followed a simple rule: it mandated that each quarter the wages of all private sector employees in the country increased by the same nominal absolute amount. This amount was computed by multiplying the quarterly change in the price index by a fixed parameter. Since the absolute SM adjustment was identical for all the workers, it obviously implied a much larger percentage change for workers earning low wages than for those earning high wages.

For example, if the wage increase was 100 Liras, it implied a 10% increase for those earning 1000 Liras, but only 1% for those earning 10,000 Liras. On average, the wage change mandated by the SM was not high enough to cover the loss in real wage due to the quarterly change in inflation for all workers, but only for the poorer 15%.

This meant that the system had a powerful equalising effect: the real wage of workers earning very little went up and the real wage of workers earning a lot went down.  Within firms, an additional effect magnified this result: as the real wage increase for workers earning less was mandated by the law, firms reacted by “taxing” their skilled workers, giving them lower wage increases than would have done otherwise, to pay for the rise due to the unskilled. High-paid workers were particularly penalised when employed in firms with many low-paid workers, as these firms were more heavily impacted by the SM.

The study shows that this system had an effect not only on wage compression but also on employment: high skilled workers tended to leave firms, which hired many low-paid workers, to move towards firms with more high-paid workers. At the same time unskilled workers were more likely to leave private dependent employment.

Although the authors could not identify if the workers were made redundant or voluntary left their jobs, they say that firms had an incentive to get rid of unskilled workers because of the higher wage increases they had to guarantee them every quarter.

According to the research, the SM also effected the likelihood of firms ceasing their operations: after its introduction, firms with many low-paid workers became more likely to exit the market, an effect more evident among larger firms.

At the end the researchers find that a simple mechanic policy of wage adjustment designed to help low paid workers and to increase equality ended up with an opposite effect. Moreover, it contributed to fuel social tensions. In 1984, for the first and last time in Italian history, white collars and middle management of FIAT (at that time the biggest private employer in Italy) organised a strike. Many believe that the reason was to be found in the wage compression induced by the SM: white collars were against a wage policy that treated them worse than blue collars and, in a few years, equalised their wages.  

Wage Compression Within the Firm: Evidence from an Indexation Scheme’ by Marco Leonardi, Michele Pellizzari and Domenico Tabasso is published in the November 2019 issue of The Economic Journal.

Marco Leonardi

Professor of Economics at University of Milan

Michele Pellizzari

Professor of Economics at University of Geneva

Domenico Tabasso

Technical Officer at Research Department of the International Labour Organization