Abstract

Italy has been experiencing a slackening in economic growth, as well as stagnating labour productivity over the last two decades. The recent economic literature has ascribed the slowdown in labour productivity to traditional supply-side factors (among which, low R&D investments, over-regulation, labour market rigidities, and an excessive role of the State), as well as to the structural change burden related to the shift towards the tertiary sector. Yet, despite this second perspective is not totally supported by evidence, in this paper we argue that the supply-side perspective alone seems not to be sufficient to explain the Italian productivity slowdown. Therefore, we extend the analysis to the role of demand-side factors, and we provide some empirical findings that validate the Kaldor-Verdoorn law, namely the dynamic effect of output on labour productivity growth. From 1970 to 2016, we find that aggregate demand dynamics are relevant in determining productivity trends, particularly in the manufacturing sector. A major economic policy implication to deal with stagnation in Italy is that expansionary policies would matter for productivity growth, and at the same time would contribute to sustaining employment recovery.