1 Productivity Stagnation and Low Human Capital Investment in a Wealthy Economy: The Case of Italy Productivity Stagnation and Low Human Capital Investment in a Wealthy Economy: The Case of Italy Invited presentation at the Third World KLEMS conference organized by RIETI Invited presentation at the Third World KLEMS conference organized by RIETI and Harvard university, Department of Economics in Tokyo, May and Harvard university, Department of Economics in Tokyo, May Carlo Milana Birkbeck College, University of London

2 Overview II. Measurement problems and proposed solution III. Empirical results I. Defining the productivity problem in Italy VI. Concluding remarks

3 Overview II. Measurement problems and proposed solution III. Empirical results I. Defining the productivity problem in Italy VI. Concluding remarks

Table 1. Nominal tangible assets per capita USA Japan U.K. Germany Italy Nominal tangible assets per capita Gross internal rate of return (percent) (USA = 100)

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9 Overview II. Measurement problems and proposed solution III. Empirical results I. Defining the productivity problem in Italy VI. Concluding remarks

10 Related contributions Afriat’s minimum (maximum) path chained Laspeyers (Paasche) index numbers are very close to the following contributions combined together: Dale W. Jorgenson and Zvi Griliches (1967), “The Explanation of Productivity Change”, Review of Economic Studies 34: Dale W. Jorgenson and Zvi Griliches (1971), “Divisia Index Numbers and Productivity Measurement”, Review of Income and Wealth, pp , who wrote: “The main advantage of a chain index is the reduction of errors of approximation as the economy moves from one production configuration to another. […] The Laspeyres approximation to the Divisia index of total factor productivity was employed in our original study of productivity change (1967)” Samuelson and Swamy (1974, pp. 576) where it is stated that “Fisher missed the point made in Samuelson (1947, p. 151) that knowledge of a third situation can add information relevant to the comparison of two given situations” Kruskal's Minimum Spanning Tree recently proposed. See Hill, Robert J. (1999a), "Comparing Price Levels across Countries Using Minimum Spanning Trees", Review of Economics and Statistics 81: Hill, Robert J. (1999b), "International Comparisons using Spanning Trees", in A. Heston and R.E. Lipsey (eds.), International and Interarea Comparisons of Income, Output, and Prices, Studies in Income and Wealth, Volume 61, NBER, Chicago: The University of Chicago Press. Hill, Robert J. (2001), "Linking Countries and Regions using Chaining Methods and Spanning Trees", prepared for the Joint World Bank-OECD Seminar on Purchasing Power Parities -Recent Advances in Methods and Applications, Washington, D.C., 30th January-2nd February, 2001.

11 The upper bound of the aggregate input price index with two observations A B Factor input 2 Factor input 1 O

....A C BPBP BLBL P ray L ray q1q1 q0q0 Input 2 Upper bound (Laspeyres-type) Lower bound (Paasche-type) Keynes’ method of limits Input 1

13 Extending a bilateral comparison to a multilateral context (Afriat, 1981) A C B Factor input 2 Factor input 1 O

Upper bound (Laspeyres-type) Lower bound (Paasche-type) Input 2 Paasche limit Laspeyres limit P ray L ray Tight bounds....A C BLBL q1q1 q0q0 q2q2 Samuelson-Afriat tight bounds = Input 1

O F E B y 1 y 0 D C Input x 2 Input x 1 A Misallocation within industry reduces productivity

Output y 1 A1 A1 A0A0 Output y 2 Output y 1. Output y 1 Between industry misallocation causes output loss

The inefficiency parameter e t is found in the interval The starting decomposition of the minimum costs are therefore obtained as cost-inefficiency parameter multiplied by observed total costs: Methodology The search for meaningful economic measures simultaneously along the decomposition

18 Laspeyres and Paasche matrices with Afriat’s tight upper and lower bound matrices So that we have the following range of possible values:

Scale elasticity and misallocation effect for every i ≥ j Finding Afriat efficiency index Finding the scale elasticity : where p is the output price and m is the pure profit margin where L and K are respectively the Laspeyres and Paasche indexes

Scale effects on TFP

Decomposing TFP growth where Output index Actual input index = Efficiency input index ∙Afriat efficiency index Scale effect index Technical change index Marginal elasticity of scale Potential gain in TFP level from removal of base-period “within” misallocation

23 Overview II. Measurement problems and proposed solution III. Empirical results I. Defining the productivity problem in Italy VI. Concluding remarks

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30 Figure 11. Average growth rates of TFP, TC, and output loss due to misallocation, (% p.a.)

31 Overview II. Measurement problems and proposed solution III. Empirical results I. Defining the productivity problem in Italy VI. Concluding remarks

32 In Italy, an underinvestment in human capital and other intangibles coupled with low rewards for high skilled labour had been part of misallocation of resources with a consistent output loss. In intercountry comparisons, Italy appears to lag behind in productivity levels and growth rates notwithstanding its rich endowment of tangible assets. A growth strategy based on the acceleration of investments in intangibles and particularly in human capital through education and professional skills seems the most appropriate solution of the Italian productivity problem. Concluding remarks