Italy: Quantifying the Benefits of a Comprehensive Reform Package

The recovery of private investment in Italy has lagged its euro area peers over the past decade. This paper examines the role of elevated labor costs in hindering the recovery. Specifically, labor costs rose faster than labor productivity prior to the global financial crisis and have remained high since, weighing on firms’ profits, capital returns, and thus capacity to invest. Empirical analysis provides evidence for the impact of wages on investment at the sectoral and firm levels. Sectoral wage growth seems unrelated to sectoral productivity growth, but is negatively associated with investment. Firm-level data permit a better identification—by exploiting the interaction between sectoral wage growth (exogenous to the firm) and the lagged labor share of the firm. A 1 percent increase in real wages is estimated to cause a 1/3 percent fall in fixed capital. Profits absorb only ½ of the cost increase, pointing to the role of liquidity constraints. These results highlight the need for labor market reform to reinvigorate investment, and thus labor productivity and job creation.

Section: External Rebalancingsupporting

confidence: 76%

Section: Figure 1 Unit Labor Cost Capital Return and Investment Nomentioning

confidence: 53%

Labor Costs and Corporate Investment in Italy

Garcia-Macia¹

2020

“…A substantial body of literature has investigated the productivity, growth and employment payoffs from improving the regulatory environment in Italy and removing competition barriers in product and service sectors. Typically, three different approaches have been used to estimate the payoff from product market regulation (PMR) reforms: 1) DSGE-based models as in Lusinyan and Muir (2013), Forni et al (2010), National Reform Programme (2012), Pinelli et al (2016), Andrle et al (2018); 2) cross-region or cross-country approaches, e.g. regulatory burden against sectorial differences in entry rates as in Bripi (2015), dynamic panel analysis to evaluate the payoff from moving to the frontier as in OECD ( 2009) and Bouis and Duval (2011), and firm-level heterogeneity in Lanau and Topalova (2016); and 3) specific reforms' impact, e.g.…”

Section: Introductionmentioning

confidence: 99%

“…Lusinyan and Muir (2013) find that closing roughly half the gap in product and labor markets with the rest of the euro area and best practice cases in the OECD could raise real GDP by 5¾ percent after 5 years and by 10½ percent in the long run. Andrle et al (2018) estimate a 4 percent output gain in the steady-state from a package of product market deregulation (closing half the gap with the frontier) and other structural reforms. González-Torres (2016) uses a general equilibrium framework with heterogeneous firms and households, and finds that cutting firm startup procedures boosts both aggregate productivity and output.…”

Section: Introductionmentioning

confidence: 99%

Identifying Service Market Reform Priorities in Italy

Belhocine¹,

Garcia-Macia²

2020

Italy’s labor productivity in market services has declined since 2000, underperforming manufacturing and peer European countries, especially in strongly regulated sectors. A model of monopolistic competition is used to identify which service sectors would benefit more from removing entry and/or exit barriers. Using Italian firm-level data, the paper finds that sectors with high markups, such as professional services, would primarily benefit from removing entry barriers. Sectors with a large mass of unproductive firms, such as retail, would instead benefit from removing exit barriers. Policy recommendations to improve efficiency are outlined in relation to the sectoral priorities identified in the data.

“…Italy has been struggling with low economic growth since the 1990s. Productivity growth has been persistently anemic and has lagged that of the euro area-see Anderson and Raissi (2018), Andrle et al (2018), Bugamelli and Lotti (2018) and the references therein.…”

Section: Introductionmentioning

confidence: 99%

Italy: Toward a Growth-Friendly Fiscal Reform

Andrle¹,

Hebous²,

Kangur³

et al. 2018

Self Cite

Published in late 2017, the Italian medium-term fiscal plan aims to achieve structural balance by 2020, although concrete, high-quality measures to meet the target are yet to be specified. This paper seeks to contribute to the discussion by (1) assessing spending patterns to identify areas for savings; (2) evaluating the pension system; (3) analyzing the scope for revenue rebalancing; and (4) putting forward a package of spending cuts and tax rebalancing that is growth friendly and inclusive, could have limited near-term output costs, and would achieve a notable reduction in public debt over the medium term. Such a package could help the authorities balance the need to bring down public debt and, thus, reduce vulnerabilities while supporting the economic recovery.