Two Italian Puzzles: Are Productivity Growth and Competitiveness Really so Depressed?

This paper focuses on two apparent puzzles for the Italian economy: i) How can an extremely poor performance in productivity growth be compatible with strong employment growth?; and ii) How can a sharp decline in competitiveness come along with higher export prices and a general situation for exporters that looks far from desperate? Some possible explanations to these puzzles are presented in this paper. Special factors such as regularisation of immigrant workers and the entry of low-skilled workers into the labour market may have contributed to depressing measured productivity and overstating the loss in competitiveness. Against the backdrop of Italy?s structural problems, this paper asks whether the Italian economy can adjust and grow. Medium-term prospects for the Italian economy remain challenging: for instance, growth in total factor productivity is still disappointingly low and competitiveness keeps deteriorating. However, there have been encouraging signs of improvement, notably the labour market has performed well over the past few years and in response to pressures from fierce foreign competition some adjustment appears to have taken place in the exposed sectors.