Experience, Innovation and Productivity - Empirical Evidence from Italy's Slowdown

fluctuations.

Table 1. Growth of labor productivity in Italy, 1970-2003, main industry groups.

Source: Daveri and Jona-Lasinio, 2005

The sharp productivity slowdown started around 1995 in both manufacturing and service industries.
Yet the zeroing of productivity growth in manufacturing - hence in “the” leading sector of the
Italian economy in the past decades - is particularly worrisome and has taken place smoothly
throughout the period but in a more pronounced fashion in 2001-03.

Experience may come into play to explain Italy’s productivity slowdown in two ways. On the one
hand, productivity fell in parallel with the introduction of piecemeal labor market reform which
eased the entry of temporary (thus un-experienced) workers in the Italian labor market. Robert
Gordon and Ian Dew-Becker (2008) conjectured that the process of labor market reform that
occurred in many European countries in the second half of the 1990s, while helping Europe reverse
the past tendencies towards job destruction, has been eventually detrimental to productivity growth.
Simplifying their view to an extreme, if temporary job creation is allowed and labor demand does
not shift outwards in parallel, labor supply shifts to the right along a given labor demand curve. No
wonder that productivity declines as a result. This happened in Italy as well in 1997-98, when
legislative changes gave full legal recognition to a host of contractual forms of part-time and
temporary jobs, some of which had been in place even before though restricted to the unofficial
labor market, while keeping job protection unchanged for permanent workers. The flurry of cheap
labor from such half hearted labor market reforms likely translated into a decline of the equilibrium
capital-labor ratio. Yet these legislative changes may have also discouraged the propensity to

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