The aim of this paper is to examine the earnings dynamic in Italy, in order to explain earnings differences between southern Italy and central-northern Italy. In our analysis we use different techniques: ordinary least squares (OLS), quantile regression models and the algorithm developed by Machado and Mata (2005). In particular, the Machado and Mata (2005) algorithm allows us to examine the relative importance of both differences in workers’ characteristics and in their returns in explaining southern, central and northern Italy earnings differences at a point in time, as well as across time within each macro-area. We focus on the role of differences in educational endowment and returns to education, one of the most important components of human capital in the stylised literature. The level of education determines the substantial disparities in terms of wage returns. However, this holds only for levels of education related to compulsory education.
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