Italy Has Record-Low Unemployment and Falling Real Wages. Both Are True.

Italy's labour market is producing two facts that ought to be incompatible. Unemployment is at its lowest level on record. And Italian workers are getting poorer.

The second quarter marked the turn. Contractual hourly wages across the economy rose 2.5% year on year while the Harmonised Index of Consumer Prices rose 3%, according to Istat — reversing a run of ten consecutive quarters in which pay growth had outpaced inflation. It was also a slight deceleration from the first quarter, when contractual wages rose 2.6%. In the private sector the second-quarter figure was 2.3%, down from 2.4%.

Meanwhile employment has continued to strengthen, with the unemployment rate falling to 5.1% in April and reaching 5% in May — an all-time low, and broadly in line with the OECD average of 4.9%.

The gap between those two facts is the Italian economy's central problem, and it is not new.

The 2021 benchmark

The OECD's Employment Outlook puts the scale of it plainly. Italian real wages are forecast to fall 0.9% in 2026 and to rise just 0.2% in 2027, with the organisation estimating Italian inflation at 3% this year against nominal wage growth of around 2.2%.

More striking is the longer comparison. Italian real wages remain 6.1% below their level in the first quarter of 2021 — the widest such gap among major OECD economies. Andrea Garnero, an OECD economist, framed the mechanism directly: inflation in Italy is running at levels similar to other countries, but nominal wages are lower, so as soon as inflation rises, wages end up underwater. He put the remaining shortfall at roughly the equivalent of 20 days of unpaid work compared with 2021 in purchasing-power terms.

Italian workers did make ground back. Real wages rose 1.3% year on year in the first quarter of 2026, benefiting from what was then a low inflation rate, though that lagged the 1.7% average across the OECD. The energy shock has since reversed the direction of travel.

Where the bargaining system is stuck

Italy has no statutory minimum wage. Pay floors are set through sector-level collective agreements, which makes the state of those agreements the single most important variable for Italian incomes — and one part of the system has stopped functioning altogether.

At the end of June there were 50 collective agreements in force, covering around 9.1 million employees and 67.3% of the total wage bill. Coverage in the private sector reached 87.5%, with wide sectoral variation: 100% in agriculture, 95.7% in industry, 79.7% in private services.

In public administration, coverage was zero. Every public-sector collective agreement has expired.

Twenty-five contracts are awaiting renewal, covering roughly 3.9 million employees. Where agreements have been renewed, the increases have been meaningful — environmental hygiene up 5.7% year on year, gas and water and chemicals both up 5.2% — while private pharmacies recorded no increase at all. Based on contracts in force at the end of June, Istat projects contractual wages rising 2.4% on average across 2026, which on the OECD's inflation estimate would leave workers behind for a second consecutive year.

The OECD explicitly links its weak 2027 forecast to the limited number of collective agreement renewals expected next year, alongside a slowing labour market.

The growth numbers are improving, which complicates the story

None of this is happening in a contracting economy. It is happening in one that keeps beating expectations modestly.

Istat put second-quarter GDP growth at 0.2% on the quarter and 1% on the year, following 0.3% in the first quarter, with domestic demand driving the expansion and net exports acting as a drag. The statistical carryover for 2026 now stands at 0.8%.

Forecasters disagree markedly about where the year lands. The Parliamentary Budget Office raised its 2026 estimate to 0.9% in August, four tenths above its April projection, crediting investment, the National Recovery and Resilience Plan and exports, while warning that rising prices are again pressuring incomes and that the recovery remains fragile. Istat has pointed to 0.7% for both 2026 and 2027. ING has worked to 0.8%. The European Commission and the OECD have both sat at 0.5%, with the OECD attributing the constraint to the renewed energy price shock weighing on household consumption, investment and exports, offsetting the impetus from PNRR disbursement.

That spread — 0.5% to 0.9% — is unusually wide for a single year at this point in the calendar, and it reflects genuine disagreement about how much of the energy shock has yet to pass through.

The fiscal position leaves limited room to compensate households. The European Commission projects Italy's deficit falling from 3.1% of GDP in 2025 to 2.9% in 2026 and 2027, while the debt ratio still rises to 139.2% by 2027. It also expects wage growth to moderate to below 3% as renewed inflationary pressure is not fully passed through to pay.

What to watch

The PNRR is the near-term variable. Investment supported by the recovery plan has been doing much of the work in the growth figures, and the plan's disbursement profile does not extend indefinitely — the European Commission has already flagged that investment will be constrained after the facility expires.

The more consequential variable is the bargaining calendar. Twenty-five agreements covering 3.9 million workers are pending, and the entire public sector is operating without one. Whether those renewals land, and at what level, will determine whether Italian real wages close the gap to 2021 or widen it further.

For now, Italy is running record employment and shrinking purchasing power at the same time — a combination that shows up in confidence surveys long before it shows up in GDP.