Local Cost of Living, Real Wages and Regional Divides in Italy since the Second World War

Any country is characterised to some extent by regional variation in productivity, which in turn causes spatial differentials in income. Yet, the actual impact of such differences on people’s wellbeing depends on their relationship with the local cost of living: if prices are lower in low-productivity areas, using nominal values to compare earnings across regions may significantly overestimate real spatial differences and obscure their evolution over time. This paper studies the case of Italy, a country characterised by persistent regional divides in income, but also by large variation in the local cost of living. Despite the large literature on Italian regional divides, there are few and limited historical reconstructions of cost-of-living differentials over time, and they are seldom incorporated by these analyses.

This paper fills the gap by presenting an original estimate of a spatial cost-of-living index and new estimates of real wage differentials from the 1940s to the 1990s. I compute a new cost-of-living index for Italy’s 92 provinces using a basket of historical price data from the mid-1960s. The price data is weighted to mimic the methodology used by the National Statistical Institute of the time, so that the cost-of-living index can then be projected backwards and forward in time using official price indexes, following a methodology first applied by Amendola et al. (2009) to present-day regional data. With respect to the few pre-existing series, mine provides greater spatial detail, higher annual frequency, and is more representative of households’ consumption basket in the past. Then, I use the cost-of-living series to deflate newly digitized provincial wage data for blue-collar workers in the industrial sector. The analysis describes not only the evolution of the resulting real wage series over time, but it also examines the influence of institutional factors that affected nominal wage levels across the country, such as collective bargaining agreements and inflation management policies.