Labour Market Structure and Inequality: A Comparison of Italy and the U.S.

Abstract

Markets with rigid labour regulations and centralized wage setting are often thought to be inefficient but egalitarian. Using a model of off- and on-the-job search and event-history, individual-level data for Italy and the U.S., we show that while the cross-sectional wage distributions of young Italian males are much more compressed than are the comparable distributions for young white U.S. males, the estimated search model implies that the distribution of lifetime welfare is no more disperse in the U.S. than it is in Italy. Our model implies that the high frequency of movements between labour market states leads to both a relatively equitable distribution of "long run" welfare in the U.S. and a high level of cross-sectional inequality.