Spatial Labor Rigidity and Long Run Growth: the Case of Italian Regional Divide

We propose an endogenous growth model with public capital and an imperfect labor market to account for the long run regional development of the Italian economy. A stylized model of a monopolistic Union characterized by heterogeneity in its members’ reservation wage creates a spatially rigid wage. We then include the above mechanism in a growth model where public investment is subject to installation costs and analyze the effects of policy changes in the period 1951-2004 on the long run growth and unemployment rate of the macro areas of Italy: Center-Northern and Southern. The calibration exercise with parameters values grounded in the economic history literature is then performed. Our results indicate that two permanent institutional innovations deeply affected the long run dynamics of the Italian regional development, both in terms of growth and unemployment: the centralization of the wage bargaining and the decentralization of the governmental functions with the birth of the ordinary regions.