More on Italy: on Dean Bakers hypothesis

Dean Baker has suggested to Krugman that one reason for the lower productivity in Italy is that actual employment was higher before the euro, or if you prefer disguised unemployment was rampant. Then with the entry in the euro several workers that were not legally hired were, and as a result it only seems that productivity fell a lot. That is, it looks like a lot more workers are not doing that much more in terms of production, when in fact the actual increase in employment was not that large, and, hence, the fall in productivity not as big. Certainly an interesting possibility. Below the employment in Italy and in France compared (1970=100).
Note that, in fact, up to the 1980s employment grew faster in Italy than in France, and by the mid-1990s this trend was reversed. While it is true that in the late 1990s, with the euro, it seems that employment again grew faster in Italy (which may be due to Dean's suggestion), note that the proportional increase is relatively small (about 3.9% with respect to France from 2000 to 2006), and has reversed since the crisis. It seems that most of the fall in productivity is real, and caused by the fact that Italy grows less. Again, I think these reflects overly restrictive policies and reflects the well know regularity known as Kaldor-Verdoorn Law.


  1. Goddamnit! You can never win!

    I brought this to Baker's attention and aked him to pass it onto Krugman. Baker is probably right, to an extent. But still, as I pointed out with the same graphs I put on your last post, lower employment is driving lower gross capital formation and this in turn probably has a lagged effect on productivity.

    You can see that this has been the case in Italy since the major rise in unemployment in the 1980s if you look at the data:

    Baker agreed that the post-2008 slowdown was due to the KV Law, but I was trying to make the case that this was a far broader phenomena that could be shown to exist all over the place.

    1. Yes, but note that the increase in employment (which would result from Dean's hypothesis is not that big). So it is unlikely that productivity fell because output grew, but employment grew more. What actually happened is that growth was subdued in Italy. So the point remains that contractionary policies explain lack of growth and KV the slowdown in productivity.

  2. So what is the timeframe that the Kaldor-Verdoorn law is supposed to operate? I admit that I always thought of it as involving technological improvements embodied in the new investment spurred by high demand, and so was supposed to be an explanation of effects of demand on productivity over the medium-long term of decades. It would't apply to periods of just a few years since the capital stock is basically fixed over such periods.

    The equivalent short-term relationship is Okun's law. It's not clear to me how one distinguishes the two relationships (both demand-->output-->measured productivity) operationally and maybe even conceptually. But Okun's law might be more appropriate for periods of just a few years, no?

    1. Yes you are correct. Okun is the cyclical relation and KV is the trend. So the point is not really about the time period per se, since both cyclical and trend forces are always in action (I have a paper here that tries to separate the effects). As the trend in productivity clearly changes after the euro, so does the trend in output growth, while that is NOT the case with employment. So it seems that it is a trend caused by the change in the macro policy regime with the euro, and being a trend I would say it is the KV effect.

    2. Right, I think that's the strongest argument against Dean's view, that the productivity slowdown seems to take the form of a deceleration of output rather than acceleration of employment growth. Of course, one could always postulate that there is a causally independent slowdown in growth happening at the same time...


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