Unemployment and Within-Group Wage Inequality: Can Information Explain the Trade-Off?

Abstract

In Italy, following WWII, speci c hiring procedures were developed that prevented rms from screening workers. More in particular, these institutions char- acterized the Italian labor market with respect to the US labor market, and were gradually removed during the 1990s. A simple matching model in which the usual Nash bargaining criterion is replaced by a game of incomplete information, shows that such hiring procedures endogenously generate wage compression within groups of observationally equivalent workers, as well as higher unemployment rates. Both the estimated behavior of within-group wage inequality in Italy, computed from the micro-data of the SHIW panel of the Bank of Italy, and the behavior of the unemployment rate in the late 1990s, are consistent with the predictions of the model.