Product and labour market imperfections in the Italian manufacturing sector: a firm-level analysis

Despite the extensive literature on product market power, evidence on markups at the firm level and which also accounts for labour market power is still limited. In this paper, we investigate the trends in both these market frictions in a large sample of Italian manufacturing firms over the period 2010–2018. In doing so, we devote particular attention to the factors underlying product market power, and especially to the way the markup is related to labour market power and the labour share of income. Our analysis reveals that, during the selected years, the manufacturing sector has experienced a limited rise in markups and a shift in labour market power away from firms and towards workers. These dynamics are mostly driven by within-firm changes. Additionally, the overall growth in bargaining power, which explains the muted positive trend in the labour share, is mainly ascribable to the rise in the average firm-level wages. However, the latter are likely to hide relevant inter-individual heterogeneity, as national data on wage inequality suggest, and monopsony power is still a widespread phenomenon, especially in the Mezzogiorno.