The Scala Mobile Looks at the Funhouse Mirror

One of Italy’s strong points, economically, is the much broader distribution of private wealth than is the case for most advanced economies. Most of this wealth consists of houses; Prime Minister Matteo Renzi is already showing his enthusiasm for cutting property taxes that affect the 80 percent of households who own their homes, usually free of any mortgage. That said, home ownership has long been out of reach for those surviving on labor income alone, especially as the light home and capital taxation regime is offset by a staggering levy on formal work.

Rome, Italy - An half closed window is seen on a house painted with graffiti in a Rome neighbourhood, March 30, 2015. REUTERS/Stefano Rellandini

Which raises the question: How did so many Italians come to own their homes?

The answer, borne out by a casual perusal of home sales and building data, is that they bought them long ago. So there must have been some golden age before 1992, since which time Italy has been the proverbial toad in a slowly boiling saucepan.

Here is a remarkable fact that may explain how home ownership became so widespread: From 1976 to 1982, the average wage of the lowest-paid workers rose by 243 percent.

The calculation comes in a new and innovative study of the “scala mobile” wage-indexation scheme in force during the period.

Marco Leonardi, Michele Pellizzari and Domenico Tabasso, from the universities of Milan and Geneva reviewed highly detailed data of around half a million people in the region of Veneto, which they found broadly matched national trends in this regard.

The scala mobile scheme allotted a fixed sum to be added to the paychecks of all workers every quarter during the high-inflation period, with a further amount set by actual inflation and other variables. As a result, the authors note, the lower one was on the pay scale, the greater the value of the fixed sum. In such a scenario, mandated by a nationwide labor rule, mortgages must have been handed out like gelato in July to blue-collar workers, most of whom at the time were in their early 30s.

The flip side of the scala mobile was that higher-skilled workers faced progressively flatter salary trends. Indeed, they were probably negative near the top, as employers essentially “borrowed” from their star employees. Overall, real wages rose 60 percent during the six years, indicating that it had a progressive impact on income but was not a fiscal policy at all.

One way that talent could react to this was to jump ship to a company with more high-skilled jobs and consequently less affected by the indexation rules. And that’s what happened, with the result being that the companies they left had less incentive to invest in the fixed and intangible capital that are part of any productivity growth story.

The scalamobile was progressively dismantled, and done away with entirely in the 1993 concertazione agreement by which Italy tried to recover from a balance-of-payments crisis and prepare for the planned European currency union. But its effects were fairly quickly noticed; by 1986 one in five blue-collar jobs were gone and industrial relations increasingly centered on employment protection laws rather than pro-growth policies.

This logjam remains, and is one reason why real wages haven’t risen at all in almost 20 years, why youth unemployment is so high, and why getting a university degree doesn’t seem to matter much. As Bank of Italy Governor Ignazio Visco often says, Italian social mobility no longer has a scala, or ascensor.

The new study highlights an episode which has a lasting legacy. A policy that had a magnificent effect in terms of mitigating the galloping income inequality then taking off in the United States and elsewhere also had some side effects. It certainly sowed the seeds for de-industrialization.

The scalamobile was hailed as a triumph of the left but paved the way for the warped fiscal discourse of today.It was a redistributionist scheme that operated through the private sector rather than through a tax scheme representing popular consensus, and so it’s hardly a surprise that the progressivity of the tax system decreased inthe 1980s.

One reason that recent efforts to reverse that have flopped is that the original beneficiaries of the scalamobileare now retired home owners. That’s the electorally blunt reason that both the left and the right trip over each other in their support for abolishing the levy on primary residences. Tax cuts on labor, which typically make working more attractive and give employers more leeway to invest in productivity and are in fact the classical form of progressive policy, will have to wait.

Of course, the claim will be made that cutting the tax will prop up aggregate demand. But once again, the evidence points elsewhere: the serious pinch on spending imposed by the house tax was felt almost entirely by the one in seven households – presumably younger - who have mortgages, as nicely analyzed by Paolo Surico and Riccardo Trezzi, two under-40 Italian economists who emigrated to find work.

It has been oft-noted, most recently in a cogent piece by Reuters’ Gavin Jones that Italy passes many reforms but implements few. One key to the reason for this is that past institutions tend to mutate rather than die.

@CHCEmsden

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