Italian worker wage gap.

There is apparently more that institutional reform can accomplish in the Italian labor market than introducing flexibility, which has been shown to reduce unemployment. A September 2007 working paper, prepared by the Bank of Italy, Italy's central bank, closely examines wage discrepancies between older and younger male workers. Older workers are paid more (on average) and differentials persist as the younger workers age--younger workers do not catch up with their older colleagues.

The specific workers studied were those younger workers who entered the Italian labor market in the 1990s.

The paper says, "Younger cohorts do not experience any catch up: Their earnings appear to grow at the same rate as older cohorts at comparable ages, so that new cohorts of workers seem to have suffered a permanent loss in their relative income." At first this was puzzling to the Bank of Italy researchers. "But what did prompt such a pronounced shift in the relative wages of younger cohorts?"

The gap under scrutiny was significant. The researchers found that the wage gap between older and younger workers increased from 20 percent in the late 1980s to 35 percent in the early 2000s. Moreover, the researchers said, "We find that this decline is not accounted for by developments in relative supplies of skill-age groups over time and reflects almost falling entry real wages."

As a cause, the researchers ruled out nearly all market forces such as supply/demand, technological, change, etc. In the absence of hard facts to the contrary, the researchers concluded, "These patterns are consistent with institutional factors,"--meaning union rules and laws protecting employment.