Wage Setting Institutions and Internal Migration: The Effect of Regional Wage Equalization in Italy after 1969

Should minimum wages adjust to local productivity? Italy’s sectoral collective agreements make no adjustment, as they establish national wage floors irrespective of regional variation in income or cost of living. While some favour its equalizing action, many have argued that this approach causes inefficiencies that include low migration to more productive areas and high structural unemployment in less productive ones. This paper addresses these concerns by studying the spatial equalization of minimum wages in 1972, when the system was first introduced, using an original dataset of labour market variables covering the period 1962-1981. First, the paper presents an augmented gravity model of internal migration showing that spatial differentials in nominal minimum wages were a strong pull factors for both short- and long-distance migration before the reform, but not afterwards. Then, discussing potential mechanisms, the paper shows that the decrease in internal migration during the 1970s was associated with the inception of the spatial mismatches that characterize Italy’s labour markets to this day.