Wage Bargaining and Directed Technical Change: Structural Consequences of Egalitarianism in Italy after 1969

Andrea Ramazzotti, London School of Economics and Political Science (LSE)

The direction of technical change – how technology augments certain production factors more than others – is a key feature of modern economic growth and a driver of income inequality. Canonical models assume that the direction of technical change is independent from labour market institutions. However, firms choose between technologies depending on the relative cost of production factors. Hence, institutions that channel exogenous shifts in factor costs can in fact influence the direction of technical change. The paper explores the effect of trade unions' activity through collective wage bargaining. Italy offers a convenient case study because, between the 1950s and the 1980s, labour market institutions gave trade unions significant influence on the wages of industrial workers. After two decades of wage moderation, in 1969 grassroots movements inside Italy’s largest factories started a wave of labour mobilisation, which translated into an egalitarian wage push. Using new data for over 40 industries, the paper shows that the shift in wage bargaining produced an extreme compression in relative wages which continued through the 1970s into the 1980s. The paper hypothesizes that this shift represented a critical juncture for Italy's industrial structure: by reducing the relative wage of skilled industrial workers, the egalitarian wage push incentivised entrepreneurs to substitute mass production with flexible specialisation technologies, which employed a lower share of low-skilled workers and made small factories scale-efficient. Using new spatial datasets from primary sources, the paper finds that the compression of wage differentials was associated with capital deepening, a decrease in the share of industrial workers employed, and a reduction in average plant size. By characterizing the wage push of 1969 as a critical juncture, the paper emphasizes the structural influence of collective bargaining, highlights the role of firms’ counteracting strategies, and speaks to the wider debate on the governance of technical change.

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 Presented in Session 248. Technology and Institutions: New Histories