For the series “Tematic Notes” edited by Directorate I – “Economic and Financial Analysis”, the Treasury Department has published online a paper on
“In the past two decades, Italy experienced a deceleration in labour productivity growth accompanied by persistently high income inequality. One possibility is that slower productivity growth has prevented inequality to fall but the direction of causation might be also the opposite. There is, in fact, the risk of a vicious cycle setting in, with individuals with fewer skills and poorer access to education and “technological” opportunities confined to work in low productivity jobs. This situation would reduce aggregate productivity and prevent inequality from decreasing. In this paper, we survey the literature on the relationship between slowing productivity gains and high inequality in Italy. In particular, we analyze five main empirical evidences at the macro level indicating possible common determinants and linkages. According to our preliminary exploration of the data, in Italy, the association between productivity and income inequality in the period 1995-2018 has been mostly negative. This evidence suggests that the gloomy dynamics of productivity might have been an obstacle to the income inequality reduction. There is also the possibility that income inequality itself was among the causes of the gloomy productivity growth. After 2012, however, both productivity and income inequality has displayed a substantial stagnation. In the period under observation, wage developments did not diverge much from those of productivity but the weak performance of the former determined a very moderate growth of real wages that might have contributed to keep income inequality high. Overall, our visual inspection of figures evidences the presence in Italy of a vicious circle “low productivity – high income inequality – low productivity”. Moreover, the possibility to break the vicious circle is prevented by the fact that Italy is among the worst performing developed countries with regard to intergenerational mobility. Intergenerational effects generate persistence in the negative feedback loop low education-low productivity-wage inequality with negative spillovers at aggregate level on productivity and income inequality”.
The views expressed in the Economic Focus are those of the authors and do not necessarily reflect those of the MEF and the DT.