In 1975 in Italy, as a result of an agreement between the Trade Unions and the Italian Manufacturers’ Association, the escalator clause mechanism was changed, establishing a 100% indexation of wages to the rate of inflation. This crucial event led to the so-called “Modigliani controversy”. This paper aims to examine the debate that arose in Italy following Franco Modigliani’s proposals over labor cost. Our main focus will be on the public debate that raised among economists, the majority of whom were part of the wide intellectual area gravitating around the left wing. Modigliani’s contributions sharpened the conflicts within the left and this resulted in a debate that ended with the acceptance of “Modigliani’s recipe”: a reduction in real wages was deemed necessary to bring Italy out of the economic crisis.
Keywords: Franco Modigliani, escalator clause, stagflation, Italy, labor cost
Jel Code: B22, E12, H11, J08