From economic decline to the current crisis in Italy

Abstract

The objective of this paper is to show that the current global economic crisis, into which Italy also fell in 2008, represents just the last step of a long declining path for the Italian economy which began in the 1990s, or to be more precise in 1992 and 1993. It is argued that the reasons that explain the long Italian decline, and partly also the deeper recession today, as well as the lack of recovery from the current crisis, can be found in the past reforms of the labour market. In particular, the labour flexibility introduced in the last 15 years had, along with other policies introduced in parallel, cumulative negative consequences on the inequality, on the consumption, on the aggregate demand, on the labour productivity and on the GDP dynamics.

Keywords:

• labour market
• labour policies
• income distribution
• productivity
• wage
• crisis

JEL Classifications:

• J010
• J080
• E250
• O470
• J300
• H120

Acknowledgements

This paper has benefited from discussion with and comments from Sebastiano Fadda, to whom the author is very grateful. The author is also very grateful to Attilio Trezzini for the very helpful comments on a previous working paper version and to Anna Giunta for her support. I thank the editor of the journal and the referees for very useful suggestions. The usual disclaimer applies.

Notes

1. Chronologically speaking, the WC (Washington Consensus) was proceeded by Reagan and Thatcher administrations (in the USA and in the UK) who managed to shape policies and to create a consensus around a new mainstream approach, during the 1980s, dominated by ‘laissez-faire’, i.e. liberalisation, deregulation and privatisation of markets. The Washington Consensus was a programme that, according to Williamson himself was badly used (Williamson 2005, 195–206).

2. Tiziano Treu was the Ministry of Labour in the left-wing Government lead by Prodi who proposed in 1997 the Law 196/1997. Marco Biagi was a Consultant of the Ministry of Labour in the right-wing Berlusconi Government (2001–2005) who inspired Law 30/2003. Biagi was killed by the Red Brigade in March 2002.

3. CO.CO.CO and CO.CO.PRO, formally, are types of independent contract jobs, linked to a specific project, without constraints for the workers in terms of hours or job location. However, these two forms of contract were (and still are) badly misused by employee, so that workers are, de facto, dependent workers, without the advantages of dependent worker contracts (such as holiday, sick-leave, social contributions, and so on).

4. The EPL index is a composite index that ranks between 0 and 6 (with higher scores representing stricter regulation, i.e. rigidities, and lower scores higher labour flexibility) calculated along 18 basic items of employment regulation, which can be classified in three main areas: regular employment; temporary employment and collective dismissal, the first two being the most important as far as individual workers are concerned. For more details see OECD (1999, 2004).

5. The Italian industrial system has shown relatively better performance during the 1990s and the 2000s as far as the industrial districts of the so-called Third Italy (in the north-east of the country) are concerned. This is mostly due to the less intensive use, made in the SMEs, of the north-east industrial districts, of temporary work and labour flexibility. And this is, to some extent, a confirmation of the fact that labour productivity does not increase with labour flexibility. On the contrary, in the Italian districts, the firm model is based on trust, social capital and other intangible assets that are acquired through long-term employment relations.

6. It would have been better, to have a more reliable picture of wage differentials than Figure 4, to compare levels of wages for each sector of the economy and disaggregate industrial composition across countries. However, among OECD countries, and in particular for France, Germany and Italy, industrial composition is quite similar, so average wages can be considered good proxies.

7. Despite the problems that can arise when comparing internationally national public expenditures, Figure 7 aims to show merely the direction of change in public expenditure.

8. Public social expenditure is the sum of ‘social benefits in-kind’ and ‘social transfers in cash’ as defined by OECD (Adema and Ladaique 2009). It includes benefits in the following social areas: Pensions, Old age, Survivors, Incapacity-related benefits, Health, Family, Active labour market programmes, Unemployment, Housing, and Other social policy areas.

9. The reason why a composite index was preferred as a dependent variable (the PI) rather than the GDP or the unemployment rate, is because the Performance Index takes into consideration both employment and GDP aspects. Using such an index would allow for a better consideration of the performance of countries during the crisis, and it avoids biases and distortions such as the fact that countries could have experienced low recession but very bad unemployment or employment reduction.

10. Similar work was done, for a panel, and for the 27 EU members together during the period 2007–2011 by Tridico (2013). That model included also control variables and produced similar results. This exercise was also repeated here and is reported in the appendix to this paper (Table A5).