Global Political Economy and Governance

Income Inequality in Italy: Policy Analysis

Biagio Rosso

Head of Global Political Economy and Global Governance Department

Income Inequality in Italy: Policy Analysis

Income inequality in Italy has increased since the mid-1980s, and the coun- try is comparatively among the most unequal ones in the OECD group. The most salient elements are rising top incomes, a squeezing middle class, and high disposable income inequality. Three factors concur in causing income inequality. The rise in top incomes and squeezing middle class is rooted in routine-biased technical change and substantially weakened employment protection legislation. The compositional prevalence of pensions in the Italian transfer scheme instead explains the high level of disposable income inequality despite high public social expenditure.

Two consequences. First, a decades-long low-grow path due to slowing consumer expenditure and suboptimal investment in the presence of credit market imperfections, while a positive effect of income inequality on growth through increased saving rates is not observed after the mid-1990s. Second, declining rates of political participation.Several policy options. Re-regulating employment is discouraged on the grounds of adverse efficiency effects and the institutional barrier of tripartite concertation. Instead, jointly improving flexicurity and increasing spending on primary and secondary education may help contain earnings polarisation and support the middle class in the longer term. To make these policies financially sustainable, and to jointly abate the level of disposable income inequality, it is necessary to reduce pension expenditure and increase top tax rates. Yet, there may be a fundamental trade-off between achieving a sustainable reduction in income inequality and political support.

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