Contractual minimum wages and industrial establishments

Small manufacturing and the establishment size distribution after the Hot Autumn

Do minimum wages affect employment through the natality and mortality of businesses and their size growth? The paper looks at the Italian case, which is characterized by the prevalence of small-size firms in the manufacturing sector. Researchers have long discussed its root causes: while some point to distant historical origins, others argue that today’s size distribution is the product of structural transformations in the 1970s. This paper tests the latter approach, focusing on the hypothesis that steep increases in sectoral minimum wages after 1969 provoked a shift from large manufacturing to small establishments due to heterogeneous effects on labour costs.

The paper compiles census data on the number of establishments and employees at ten-year intervals from 1951 to 2001 for over 8,000 municipalities and circa 15 two-digit industrials sectors, combined with a range of local demographic and economic variables. The paper performs a quantitative analysis by comparing municipality-sector cells that in 1969 received a steeper increase in minimum wages with cells that received a lower increase. This variation was largely provoked by contemporaneous institutional reforms which I exploit for identification.

Results show that places that experienced a steeper increase in minimum wages recorded a lower count of manufacturing establishments after the shock, despite showing no systematic differences before. The negative effect on the number of manufacturing establishments appears to continue for over three decades. Looking at the short-term effect, the analysis also finds supporting evidence that the shock reduced the number of establishments of medium size, causing a polarization of the size distribution. The discussion leverages descriptive quantitative sources to propose possible interpretations and to explain heterogeneity by area and sector.

The paper speaks to several literatures in labour economics and economic history. First, it discusses the the influence of labour market institutions on firm creation and growth in the long run. Second, it addresses the historical roots of Italy’s skewed firm size distribution.