Is There a Trade-off Between Labour Flexibility and Productivity Growth? Some Evidence from Italian Firms

Abstract

The Italian economy has been experiencing a serious slowdown of labour productivity growth since the end of the 1990s, when it started to diverge from the trend of other industrialized countries, and has become even negative in most recent years.

I wish to thank Area Studi Capitalia for generously giving me access to their firms’ database. I am grateful to Marcella Corsi, Alfred Kleinknecht, Paolo Piacentini, Andrea Salvatori and Leonello Tronti for useful comments and discussions.

Appendices

Appendix A: Labour Productivity Decomposition

This appendix explains the decomposition of labour productivity growth presented in Fig. 13.1. Since labour productivity, at an aggregate level, is a weighted average of sectoral productivity levels with weights corresponding to the employment shares of each sector, its trend depends both on the variation of productivity in each sector and on the variation of the sectoral composition of employment. Therefore, productivity growth between two periods can be algebraically decomposed into a between component, a within component, and a residual. The first component represents the contribution to productivity growth made by the reallocation of labour from low-productive to high-productive industries, corresponding to the increased productivity that would be observed maintaining productivity levels constant within sectors. The second identifies the growth of productivity due merely to intra-sectoral increases, in the absence of labour reallocation. Finally, the residual captures the interaction effects between productivity and employment at the industry level, taking a positive sign if the two variables are positively correlated, a negative one in the opposite case. The formula used for the decomposition is the following:

$$ \frac{{\pi_{t} - \pi_{0} }}{{\pi_{0} }} = \frac{{\sum\limits_{i = 1}^{n} {\pi_{it} q_{it} - \sum\limits_{i = 1}^{n} {\pi_{i0} q_{i0} } } }}{{\sum\limits_{i = 1}^{n} {\pi_{i0} q_{i0} } }} = \sum\limits_{i = 1}^{n} {\left[ {\frac{{q_{it} - q_{i0} }}{{\pi_{0} }}\pi_{i0} + \frac{{\pi_{it} - \pi_{i0} }}{{\pi_{0} }}q_{i0} + \frac{{\left( {\pi_{it} - \pi_{i0} } \right)\left( {q_{it} - q_{i0} } \right)}}{{\pi_{0} }}} \right]} $$

where $\pi_{t}$ is aggregate labour productivity at time t, $\pi_{it}$ is labour productivity in sector i at time t, and $q_{it}$ is the share of employed in sector i at time t. The first term in the square brackets is the ‘structural change’ (between) effect in sector i; the second term is the ‘productivity growth’ (within) effect in sector i; finally, the last term is the interaction effect in sector i.

The decomposition between 1984 and 2004 (by 5-year intervals) was performed using value added per equivalent labour unit (at constant prices) as the labour productivity index, and sectors were selected according to the Ateco 2002 classification at 1-digit level (sections and subsections, 30 sectors). Table 13.5 summarizes the results of the analysis.

Table 13.5 Decomposition of average annual labour productivity growth

Appendix B: Variables Definitions and Descriptive Statistics

Value added per worker: value added was calculated as the value of production (net sales ± variation of inventories, + capitalized costs) less net consumption (materials ± variation of inventories) and services. It was deflated using value added deflator disaggregated at 2-digit level, and divided by the number of workers declared by firms in the questionnaire. Firms reporting negative or zero value added were not considered.

Investment per worker: investment in equipment and machinery as declared in the questionnaire, deflated with the gross investment deflator at 2-digit level of disaggregation and divided by the number of workers.

Labour cost per worker: labour costs deflated with the consumer price index and divided by the number of workers. When considered in the interval 1998–2000, the average number of employees during the year (taken from balance sheet data) was considered.

R&D/Sales ratio: R&D expenditure divided by the amount of sales, both derived from questionnaires Table 13.6.

Table 13.6 Descriptive statistics (full sample, 2001–2003)

Share of fixed term contracts: percentage of workers (both full-time and part-time) on fixed-term arrangements.

Total labour turnover: sum of hirings and layoffs divided by the number of workers.