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Italy's productivity puzzle and twenty lost years

by Luca Ricolfi

24 Exclusive content for IT24

January employment data, which showed an increase in the number of employed despite a tapering off of significant tax breaks for new hires, ignited a spark of hope on the progress of our nation's economic recovery.

The analysis showed, without much margin for doubt, that the pace of job creation has been a bit better that what might have been expected given the movement in GDP.

The GDP dynamic, for its part, is seeing a slow acceleration and, for the last quarter of 2015, surpassed 1% on an annual basis. If we look at full-year 2015, we see that for the first time since 2011, the GDP dynamic was not below that of employment. This generally means that current productivity per worker is basically flat, neither growing or shrinking.

Is this good news? That depends on your point of view. If we were a normal country, we'd be worried. Because in a normal country, productivity doesn't stand still but generally, rises from year to year. But we are not a normal country. Italy is one of the few nations in the developed world where workplace productivity doesn't tend to rise, rather, it falls. In 2000, the annual value added per worked was just over €72,000 (based on 2010 prices). In 2007, at the end of a brief expansion in 2006-2007, it was over €74,000. But today, it's even lower (less than 69,000) than it was during the “annus horribilis” of the prolonged economic downturn from 2007-2014. We must go all the way back to 1996, a full twenty years ago,
to find a year when we were less productive than today. Looking back, the current stagnation in workplace productivity may sound like positive news: perhaps we've stopped falling after a long phase of erosion the production per worker.

But what's behind this pronounced tendency towards productivity decline?
Part of the explanation is statistical: productivity per worker fell because the average number of work hours per worker, since 2007, has declined (except in 2015 when there was a slight uptick). If, instead of measuring productivity against GDP--employment relationship, we measure it against GDP and hours worked, the trajectory of the last 20 few years looks somewhat different.

Productivity per hour worked was still growing in the second half of the 1990s, but over the last 15 years (except for a thud in 2009) it has remained substantially unchanged, albeit with a slight downward tilt. In 2000, one hour of work generated an income of €37. Today (using 2010 prices) it generates a figure that's just slightly lower (€36.5). The real problem, therefore, is to understand why it is that over the past 15 years the average productivity of the system, measured per hour of work, has never, ever gone up.

It should be noted that these 15 years were marked by technical and structural advances that without a doubt impacted thousands of companies and organizations that adopted new technology, digitized their workflow processes, and imported more efficient production models.

If, despite all this, average productivity remained stagnant before and after extended crisis (2007-2014), there must have been extremely powerful countervailing forces at work, which neutralized and offset the natural tendency of businesses to become more efficient.
Basically, the long and ongoing stagnation in productivity, which began suddenly (and only in Italy) at the end of the 1990s, and lasted nearly 20 years, needs an explanation.

I say this because, in my opinion, Italy's biggest problem, its low employment rate, among the lowest in the West, is related to productivity. Improving productivity after fifteen-years of stagnation would offer some near-term hope that employment might start growing at a rate needed to reabsorb, at least in part, the massive “reserve army” of the unemployed, the discouraged, and black market workers—a group of about 10 million people who remain outside of the circuit of regular employment.

It's true, one could note, that in reality many explanations have been offered to explain stagnating productivity, some, frankly, rather fanciful: joining the euro; the decline of manufacturing; the liberalization of the labor market; higher taxes; public administration reform; a lack of employment flexibility; union power; reduced consumer demand; erosion of profit margins; and declining investment — to name a few. The point is, however, that the explanations are too numerous, and too often incompatible with each other. There still no real diagnosis, nothing that tells us how to get workplace productivity growing at a normal pace again, in line with that of other advanced nations.

It's really the explanation we most need if we want to break this long period of stagnation that's weighed on us since the late1990s.