By focusing on the Italian experience, we ask whether the relationship
between labor taxes and unemployment varies across regions. In spite of
similar national labor market institutions, we show that this relationship is
significantly stronger in the highly industrialized North than in the underdeveloped
South, where unemployment is much higher. An important
source of variation in the regional responsiveness of unemployment
originates from the fact that regional gross wages in the North increase
more than in the South in response to a hike in labor taxes. Regional wage
setting affects regional employment (and unemployment) both directly and
indirectly, via its impact on regional profits and the capital stock
