TheConvergence of the Italian Regions and Unemployment: Theory and Evidence

We explore the links between the halt of the convergence process of Italian regions at the beginning of the 1970s and the increase in regional unemployment dispersion. We consider a neoclassical exogenous growth model with an imperfect labor market and show that during the transitional dynamics the imperfections of the labor market negatively influence the output growth rate. In particular, the model implies that centralized bargaining is likely to set a national minimum wage that is too high with respect to the labor productivity of the less developed regions, resulting in a negative impact on their per capita output growth. We test the implications of the model on a regional panel data set using the GMM framework. Both our market distortion measure and the unemployment rate are found to significantly lower the growth rate of per capita output.