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How Matteo Renzi’s jobs act will sink Italy


Renzi has pledged to enact reforms that tackle Italy’s growth and productivity crisis. But his ‘flexible’ labour reforms – which will allow employers to fire workers on the payroll for three years without justification – will do nothing to reverse the backwardness of Italy’s economy.

The decline in Italian productivity is dire. Since the mid-nineties, productivity growth has fallen four-fold, from 1.65% to 0.39%. During the same period, the rate of capital accumulation fell eight fold. From 4% to a paltry 0.5% – first down to 2.6 % per annum before sliding in the nineties to 1.5% per year and then since the (2008) crisis down to half a percent. The flip side of this dynamic is the rate of growth in capital intensity, the ratio of capital to labour. In the thirty years it has halved from an average of 2.1% per annum in the mid nineties, to a paltry 0.96% today.

These negative dynamics of labour productivity, the investments made by companies, and the capital/labour ratio, lead to a stagnation in total factor productivity – the factor of technological advancement par excellence – which has fallen from a modest 1% per annum in the first phase, to close to zero in the second phase, and then going into negative territory since the crisis of 2008.

What is it that happened at the turn of the nineties and later to the present day to induce companies to stop investing in the quality of work and technology? Among the many things that happened, the two most important are wage moderation and flexibility of the labour market.

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