Trade and Employment in Italy

Abstract

This paper addresses the relationship between trade, employment and wages in Italy from the perspective of the specific features of its international specialisation pattern. It focuses on several key questions: To what extent has international economic integration, including trade and international outsourcing, changed the structure of the Italian economy? To what extent has exposure to foreign competition helped Italian firms to restructure and upgrade their production, so as to increase the skill intensity of their activities? What are the effects of these processes on employment and wages? The paper opens with a short review of the relevant literature and a description of recent developments in the trade specialisation pattern of the Italian economy, including its linkages with the structure of employment. This is followed by the main original contribution of the paper consisting of an econometric study structured around two parts. The first part presents an estimate of the employment effects of trade and off-shoring in the Italian manufacturing industry based on a panel of 15 sectors for the period from 1999 to 2008. The second part addresses the relationship between trade and wages using a rich micro-level panel of individual workers for the period from 1997 to 2003. In light of the results, the paper then considers the main policies adopted in Italy to facilitate the adjustment of employment and wages to external shocks, including short-term effects of trade liberalisation. The Italian case appears to confirm that international economic integration, while generating important static and dynamic benefits, requires a flexible and efficient social security system, able to assist workers displaced by external competition or other kinds of structural change. In view of shortcomings in the existing system, a comprehensive social security reform, inspired by principles of universal access, medium-term financial equilibrium, and a proper design of individual incentives, may be necessary to better help workers displaced by international integration.

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