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Regional imbalances and aggregate performance in a leading sector model of the labour market: an analysis of Italian data 1977-1991

This paper presents a model in which wages throughout the economy depend only on the labour market conditions in some low-unemployment sector. In equilibrium, a labour demand shift towards the primary sector tends to raise the unemployment rate everywhere else in the economy and leaves wages unchanged. Overall this implies an increase in aggregate unemployment. Based on SHIW micro data for the period 1977-1991 we find that wages in Italy depend only on the tightness of the labour market in the North. We estimate that around 15% of the increase in aggregate unemployment in Italy can be explained by a shift in labour demand in favour of the North not matched by an equal shift in labour supply.