Italian labour productivity: a wage-led decline

This paper aims at explaining productivity behaviour through wage share dynamics in Italy in the period ranging from 1960 to 2023. To this end, the growth rate of GDP per worker measured at full time equivalent and the wage share at factor cost - suitable for measuring the weight of labour on production choices – are connected through an autoregressive distributed lag (ARDL) cointegrating technique. The estimates, identifying a univocal direction of causality, reveal that a change in the wage share affects, through a coefficient of about 0.2, the productivity growth rate in the same direction in the long-term. Results support the idea that the strategy of wages’ containment contributed to shape a productive model discouraging investments and organizational improvements while favouring low value-added sectors. The reduction of workers’ bargaining power, the flexibilization of the labour market and the general drastic reduction in labour costs, enhanced to compete on international markets and institutionalized through legislation since the 80s, gave further impetus to this process, undermining the Italian growth potential. Further checks, including other variables affecting productivity, not only confirm the results but also indicate that low productivity is neither linked to an excessive presence of the public sector nor to the reduction of unemployment. The Italian wage stagnation is therefore not just a matter of inequality and poverty but a challenge for the entire productive system.