The Relationship Between Real Wages and Labour Productivity in Italy

December 2018

THE RELATIONSHIP BETWEEN REAL WAGES AND LABOUR PRODUCTIVITY IN ITALY

Macroeconomics

Word count: 2,500

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Table of Contents

1.0 Introduction ................................................................................................................................ 2

1.1 Aims and objectives ................................................................................................................ 2

1.2 Background ............................................................................................................................. 2

2.0 Framework and definitions ......................................................................................................... 5

2.1 Aggregate production function ............................................................................................... 5

2.2 Labour productivity ................................................................................................................. 5

2.3 Real wages .............................................................................................................................. 6

3.0 Analysis ....................................................................................................................................... 7

3.1 Aggregated productivity ......................................................................................................... 7

3.1.1 Labour ............................................................................................................................. 7

3.1.2 Capital ........................................................................................................................... 10

3.1.3 Technology .................................................................................................................... 13

3.2 Labour productivity ............................................................................................................... 15

3.3 Real Wages ............................................................................................................................ 16

4.0 Relationship between real wages and labour productivity ...................................................... 17

5.0 Conclusion ................................................................................................................................. 19

6.0 Reference list ............................................................................................................................ 20

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1.0 Introduction

1.1 Aims and objectives

This report aims to examine the relationship between real wages and labour productivity in Italy over the past 20 years. The report examines the question from a macroeconomic perspective by analysing relevant statistics on aggregate real wage and productivity and by utilising macroeconomic analysis frameworks.

The objectives of this paper are to:

 Analyse factors affecting labour productivity in Italy over the past 20 years;

 Examine real wages in Italy over the past 20 years; and

 Analyse the extent and correlation of labour productivity to real wages in Italy over the past 20 years.

1.2 Background

Italy is the third largest national economy in the Eurozone and the eighth largest by nominal GDP in the world (Statistics Times, 2018). Italy is a founding member of the European Union, the Eurozone, the OECD, the G7 and the G20. Its economic structure relies mainly on manufacturing and services. The country exports a significant variety of products including machinery, vehicles, pharmaceuticals, furniture, food, clothing, and robots (Workman, 2018). The service sector employs nearly 70% of the country’s total employed people, accounting almost three quarters of the total GDP (Focus Economics, 2018). The Italian economy consists of a prosperous north with a less developed south, resulting higher unemployment and lower per capita income in the south compared to the north region (Mauro, 2004). Suffering from political instability, economic stagnation and lack of structural reforms, the country’s economy has been struggling compared to other OECD countries in recent times (figure 1.

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Figure 1: Real GDP per capita, average growth rate (Atlas, 2018)

Italy’s GDP has been growing at a fairly consistent rate between 1998 and 2018, with a slight drop in 2008 – 2009 (figure 2).

Figure 2: Italy GDP (OECD, 2018)

Italy’s GDP per capita, shown in figure 3, is growing at a slower rate than the France, Germany and the UK. The economy after the credit crunch (2008) has entered into a long recession with the GDP per capita growing only after 2015.

Figure 3: Italy GDP per capita compared to EU large economies (OECD, 2018)

Before the Great Recession (2007) the labour wages and productivity in Italy are growing with a fairly correlated rate. During the Recession GDP fell in 2008, which coincided with wage stagnation and

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