Claudia Fontanari (Ministero dell'Economia e delle Finanze)

Abstract: In recent decades, anemic productivity growth has characterized many advanced countries, and spatial disparities have emerged at country and regional level. In Europe, productivity disparities have been identified in the prevailing literature as the main cause of trade imbalances between eurozone countries. This interpretation leads to indications in favor of a recovery of productivity and competitiveness in peripheral countries through structural reforms, aimed at containing labor costs, increasing labor flexibility, and increasing competition in the markets. Starting from a demand-led growth perspective, the aim of this study is to provide a dynamic analysis of the determinants of labor productivity, which is especially focused on the possible direct effects of real wages on productivity dynamics, extending the analysis proposed in Fontanari and Palumbo (2022). We employ the Local Projections (LP) technique to estimate the Sylos Labini productivity equation for a panel of 14 European countries over the period 1995-2018. The analysis is conducted at different levels of
aggregation, applying the LP technique to three-dimensional panel data (country-sector-year), and for different groups of countries, distinguishing between “core”, “peripheral”, and “East European” countries. Furthermore, we analyze the possible asymmetrical behavior of the effect of labor cost changes on productivity growth, differentiating between periods of prolonged expansion vs moderation of wages. Our results confirm Sylos’ insights and, particularly, the direct effects of wage changes on productivity growth, both at the country and sectoral level. These effects also appear to be validated in terms of wage expansion/stagnation and show an asymmetric behavior in terms of both intensity and timing. Spatial analysis shows that our findings hold for all the groups of countries. Yet, while the positive effect on productivity of market expansion is equally confirmed for all the three groups, some spatial disparities emerge for the effect of labor cost. The main differences concern in the incentive to introduce labor-saving innovations arising from increased labor costs, which is
more effective in core countries. Overall, our analysis suggests that a strategy of growth based on structural reforms aimed at increasing productivity and competitiveness by containing labor costs is in danger of failing in his own purpose and achieving, indeed, the opposite effect.