New Bank of Italy Working Papers on "The Concentration Channel of the Minimum Wage" and "Short-Time Work, its Replacement Rate and Labour Mobility"

The Bank of Italy has just published two papers of mine in its Working Papers series.

In The Concentration Channel of the Minimum Wage (joint with Salvatore Lo Bello), we study the equilibrium and welfare effects of the minimum wage when product market power is endogenous and varies with the degree of market competition. A higher minimum wage reallocates workers from small to large firms. Large firms gain market share and increase their price markups. We call this mechanism ‘the concentration channel’ of the minimum wage. We develop an equilibrium model with frictional labour markets and oligopolistic product markets. We estimate the model using Italian administrative data, replicating the structure of detailed labour and product markets. We find that both the aggregate labour share and consumption are hump-shaped in the minimum wage, due to the opposing responses of price markups and wage markdowns. The optimal minimum wage directly affects 10 per cent of workers. Endogenous product market power lowers the optimal minimum wage. We also provide empirical evidence supporting the concentration channel.

In Short-Time Work, its Replacement Rate and Labour Mobility (joint with Gaetano Basso, Emanuele Ciani, and Francesco Manaresi), we study the impact of the short-time work (STW) replacement rate on workers’ job-to-job mobility. Exploiting a discontinuity in the Italian STW benefit schedule and matched employer-employee data, we show that a 10-percentage-point increase in the replacement rate raises the probability of remaining with the current employer by 3 per cent, thereby reducing job-to-job flows. The effect is driven by low-ability workers, who are less likely to move to higher-paying firms, suggesting a deterioration in workforce quality among firms relying on STW. We develop a model to rationalise these results and derive an optimal STW benefit formula. The fiscal externality is positive but smaller than that generated by unemployment benefits.