Little innovation, many jobs: An econometric analysis of the Italian labour productivity crisis

Over the past 20 years, Italy has realised changes in labour legislation, leading to a decentralisation of wage bargaining and increased flexibility in labour relations. Both these factors have helped to curb wage growth and to enhance employment growth, but have also led to a crisis in Italian labour productivity growth. Our estimates among 3,000 firms show that firms with a high share of flexible workers, a high labour turnover and lower costs of labour (relative to capital) experienced significantly lower rates of labour productivity growth. Our findings raise doubts about the mainstream call for flexibilisation of European labour markets. We argue that the Italian shift towards a low-productive and labour-intensive growth path is problematic against the background of an ageing population.