11

Productivity Stagnation and Low Human Capital Productivity Stagnation and Low Human Capital Investment in a Wealthy Economy: The Case of ItalyInvestment in a Wealthy Economy: The Case of Italy

Invited presentation at the Third World KLEMS conference organized by RIETIInvited presentation at the Third World KLEMS conference organized by RIETI and Harvard university, Department of Economics in Tokyo, 19-20 May 2014 .and Harvard university, Department of Economics in Tokyo, 19-20 May 2014 .

Carlo MilanaBirkbeck College, University of London E-mail: c.milana@bbk.ac.uk

22

OverviewOverview

II. Measurement problems and proposed solution

III. Empirical results

I. Defining the productivity problem in Italy

VI. Concluding remarks

33

OverviewOverview

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 capitaTable 1. Nominal tangible assets per capita

  USA Japan U.K. Germany Italy

Nominal tangible assets per capita 1995 2000 2005 2010 

Gross internal rate of return (percent) 1995 2000 2005 2010 

 (USA = 100) 100.0 158.0 73.5 105.0 113.1 100.0 155.0 71.0 109.0 120.0 100.0 154.0 69.6 119.6 133.5 100.0 150.0 67.0 117.0 129.0     6.3 4.2 5.7 4.6 3.6 8.5 4.9 5.9 6.9 5.9 11.8 6.0 6.7 7.7 5.3 7.0 4.7 5.0 4.5 4.0 44

55

2000-2008

2000-2008

77

88

99

OverviewOverview

II. Measurement problems and proposed solution

III. Empirical results

I. Defining the productivity problem in Italy

VI. Concluding remarks

1010

Related contributionsRelated contributionsAfriat’s Afriat’s minimum (maximum) path chained Laspeyers (Paasche) index numbersminimum (maximum) path chained Laspeyers (Paasche) index numbers are are very close to the following contributions combined together:very close to the following contributions combined together:

Dale W. Jorgenson and Zvi Griliches (1967)Dale W. Jorgenson and Zvi Griliches (1967), “The Explanation of Productivity Change”, , “The Explanation of Productivity Change”, Review of Economic Review of Economic Studies Studies 34: 249-283.34: 249-283.

Dale W. Jorgenson and Zvi Griliches (1971)Dale W. Jorgenson and Zvi Griliches (1971), “Divisia Index Numbers and Productivity Measurement”, , “Divisia Index Numbers and Productivity Measurement”, Review of Review of Income and WealthIncome and Wealth , pp. 227-229, who wrote: “The main advantage of a , pp. 227-229, who wrote: “The main advantage of a chain indexchain index is the reduction of errors is the reduction of errors of approximation as the economy moves from one production configuration to another. […] of approximation as the economy moves from one production configuration to another. […] The The Laspeyres approximationLaspeyres approximation to the Divisia index of total factor productivity was employed in our original to the Divisia index of total factor productivity was employed in our original study of productivity change (1967)”study of productivity change (1967)”

Samuelson and Swamy (1974, pp. 576)Samuelson and Swamy (1974, pp. 576) where it is stated that “Fisher missed the point made in where it is stated that “Fisher missed the point made in Samuelson (1947, p. 151) that Samuelson (1947, p. 151) that knowledge of a third situationknowledge of a third situation can add information relevant to can add information relevant to the comparison of two given situations”the comparison of two given situations”

Kruskal's Kruskal's Minimum Spanning TreeMinimum Spanning Tree recently proposed. See recently proposed. SeeHill, Robert J. (1999a)Hill, Robert J. (1999a), "Comparing Price Levels across Countries Using Minimum Spanning Trees", Review of , "Comparing Price Levels across Countries Using Minimum Spanning Trees", Review of Economics and Statistics 81: 135-142. Economics and Statistics 81: 135-142.

Hill, Robert J. (1999b)Hill, Robert J. (1999b), "International Comparisons using Spanning Trees", in A. Heston and , "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 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.and Wealth, Volume 61, NBER, Chicago: The University of Chicago Press.

Hill, Robert J. (2001)Hill, Robert J. (2001), "Linking Countries and Regions using Chaining Methods and Spanning , "Linking Countries and Regions using Chaining Methods and Spanning Trees", prepared for the Joint World Bank-OECD Seminar on Purchasing Power Parities 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.Recent Advances in Methods and Applications, Washington, D.C., 30th January-2nd February, 2001.

1111

The upper bound of the aggregate input The upper bound of the aggregate input price index with two observationsprice index with two observations

A

B

Factor input 2

Factor input 1O

....A

C

BP

BL

P ray

L rayq1

q0

Input 2

Upper bound (Laspeyres-type)

Lower bound (Paasche-type)

Keynes’ method of limits

Input 1

1313

Extending a bilateral comparison to a Extending a bilateral comparison to a multilateral context (Afriat, 1981)multilateral context (Afriat, 1981)

A

C

B

Factor input 2

Factor input 1O

Upper bound (Laspeyres-type)

Lower bound (Paasche-type)

Input 2

Paasche limit

Laspeyres limit

P ray

L ray

Tightbounds

....A

C

BL

q1

q0

q2

Samuelson-Afriat tight bounds

...min ...ij ik kl mjkl m

M L L L

...max ...ij ik kl mjkl m

H K K K

1

jiM

=

1

jiM

Input 1

O

F

E B

y1

y0

D

C

Input x2

Input x1

A

Misallocation within industry reduces productivity

A1

A0

Output y2

.

Output y1

Between industry misallocation causes output loss

The inefficiency parameter et is found in the interval

( , ) ( ) ( )t t t t w x w x

The starting decomposition of the minimum costs are therefore obtained as cost-inefficiency parameter multiplied by observed total costs:

( , )t t t t ti ii

e w x w x

MethodologyThe search for meaningful economic measures The search for meaningful economic measures

simultaneously along the decomposition

1818

Laspeyres and Paasche matrices withLaspeyres and Paasche matrices withAfriat’s tight upper and lower bound matricesAfriat’s tight upper and lower bound matrices

1

1

1

1

434241

343231

242321

141312

LLL

LLL

LLL

LLL

L

1111

11

11

111

1

1111

342414

432313

423212

413121

LLL

LLL

LLL

LLL

P

1)()(

1)(

)(1

1

433243213243

34322132

34232321

342312231212

LLLLLL

LLLL

LLLL

LLLLLL

M

1111

11

11

111

1

1111

343423342312

43232312

32433212

213243213221

LLLLLL

LLLL

LLLL

LLLLLL

H

So that we have the following range of possible values:

rsrsrsrs LMHP measure True

/X Xij ij ij ij ij ij ijL e X X X K e

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

11,0 1 0 1,0

0

( ) / ( )e

EX Xe

x x

1,0

1,0 1,01( )SE EX

1,0 1,0

1,01,0 1,0

1,0

1,0

1 and increasing returns to scale ( >1)1 with

1 and decreasing returns to scale ( <1)

any (positive) and constant returns to

1 wit

h

EXSE

EX

EXSE

1,0

1,0

1,0 1,0

1,01,0 1,0

scale ( =1)

1 and any returns to scale

1 and decreasing returns to scale ( <1) 1 with

1 and increasing returns to scale ( >1)

EX

EXSE

EX

Scale effects on TFP

Decomposing Decomposing TFPTFP growth growth

1,01,0 1,0 1,0 0 1

1,0

= Y

TFP TC SE OC eX

where

0 0 0 1 1 11,0 1,0 1,0

0 0 1 1

(1 )e e

p y p y

w x w x

Output index Actual input index = Efficiency input index ∙Afriat efficiency index

Scale effect indexTechnical change index

Marginal elasticity of scale Potential gain in TFP level from removal of base-period “within” misallocation

Output

InputseX X

TC

TFP

TFP, TC, misallocation and scale effects

2323

OverviewOverview

II. Measurement problems and proposed solution

III. Empirical results

I. Defining the productivity problem in Italy

VI. Concluding remarks

2424

2525

2626

2727

2828

2929

3030

Figure 11. Average growth rates of TFP, TC, and output loss due to misallocation, 1991-2010 (% p.a.)

3131

OverviewOverview

II. Measurement problems and proposed solution

III. Empirical results

I. Defining the productivity problem in Italy

VI. Concluding remarks

3232

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