More people in work but poorer: the limitations and paradoxes of the Italian model

In recent years, Italy has reached unprecedented levels of employment. However, in real terms, those in work today earn less than they did twenty years ago. This is a structural issue: whilst real wages in Germany have risen by over 30 per cent since 1990, and in France by around 25 per cent, in Italy they have fallen. According to the International Labour Organisation, since 2008 Italian real wages have fallen by 8.7 per cent – the worst figure among all G20 economies. Why is it that a country creating jobs is unable to translate this growth into higher wages? The answer lies in three main, interrelated factors: labour productivity that has been stagnant for decades, a tax system that penalises labour, and economic policy choices that have prioritised welfare and short-term flexibility over structural investment.

The link between productivity and wages is almost automatic: a company can only pay higher wages if the value produced by each worker increases over time. If labour productivity does not grow, the ‘pie’ to be divided between profits and wages remains the same size. Between 1999 and 2024, whilst labour productivity in high-income countries rose by 30 per cent, in Italy it fell by 3 per cent. A divergence of over thirty percentage points in a quarter of a century. No wage policy measure, however well-designed, can overcome this problem. As far as taxation is concerned, labour is the main target of taxation in Italy. The tax wedge is among the highest in Europe: according to the OECD, in 2024 it reached 47.1 per cent of the labour cost for an average worker with no dependants. In practice, a net pay rise of 100 euros can cost the employer as much as 180–200 euros. It is easy to see how this acts as a brake on both new recruitment and pay rises.

Finally, our country is characterised by a subsidised rather than a competitive labour market. A number of historical factors explain how this model has become established. The misuse of social safety nets such as the wage subsidy scheme (cassa integrazione), which was designed for temporary crises but has for decades also been used for ailing companies. Unconditional income support schemes such as Quota 100 and the Citizenship Income. The regulatory instability of the labour market, which, oscillating between periods of greater rigidity and greater flexibility, has generated uncertainty which, in turn, has resulted in additional costs for businesses’ long-term investments. The lack of competition in protected sectors, which entrenches economic rents rather than driving efficiency.

If we look at what is happening in Europe, where the same problems have been tackled with very different outcomes, we can see just how anomalous Italy’s trajectory is. Germany, with the Hartz reforms of 2003–2005, despite having gone through a phase of high labour market flexibility characterised by wage compression, accompanied this with sustained industrial investment and a dual system of technical training. This enabled it to maintain rising productivity, which in turn allowed it to recover real wages. Spain shares Italy’s fragmented production structure, but in recent years it has recorded higher productivity growth and has overtaken Italy in terms of investment in research and development, aided by greater foreign investment. Finally, France maintains a tax wedge as high as Italy’s, but this is accompanied by major industrial champions that underpin aggregate productivity.

These considerations show that the Italian paradox of more people in work whilst real wages remain stagnant or are falling is not the result of a single policy error or a single unfavourable economic cycle. Rather, it is the cumulative result of choices made over the course of three decades: a labour market that has prioritised quantitative flexibility over investment in productivity; a tax system that heavily taxes labour; a productive structure consisting overwhelmingly of firms too small to sustain investment; a system of social safety nets and income support often lacking effective conditionality; and sectors of the economy shielded from competitive pressure. None of these factors, taken in isolation, would be sufficient to explain an anomaly of this magnitude compared with the rest of Europe. It is their combination and, above all, their persistence over time that makes the problem structural rather than cyclical. There is no single measure capable of reversing the trend, but only a coordinated package of reforms sustained consistently over a sufficiently long period to allow productivity to make up for lost ground.

The challenge facing Italy in the coming years is therefore not to create even more jobs in quantitative terms – a target the country has already largely achieved – but to improve the quality of those jobs. Policy measures and systemic reforms are needed to make employment more productive, better paid and capable of generating the growth in domestic consumption that is currently lacking and which continues to hold back the country’s overall economic growth compared with its main European partners.