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Giornale degli Economisti e Annali di Economia


Volume 68 - N. 3 (Settembre 2009) pp. 269-309

THE ITALIAN PRODUCTIVITY DECLINE:


EVIDENCE FROM REGIONAL DATA

MAURIZIO CONTI1
University of Genova

Received: December 2008; accepted: August 2009

In this paper the evolution of labour productivity and TFP is analysed for the Italian re-
gions at the sector level over the period 1980-2004 using growth accounting techniques.
The results suggest that the decline in productivity after 1995 has been widespread across
sectors and regions, although in southern Italy the decline has been weaker; in turn, TFP
growth seems to have been the major responsible for both the decline of labour pro-
ductivity growth and for explaining regional labour productivity growth differentials. The
estimation of a TFP growth model inspired to the Neo-Schumpeterian Growth Theory
suggests that a key role in driving the different pattern in TFP growth between northern
and southern regions may have been played by catching up processes, as regions that
were far away from the technological frontier, mainly located in the south, have displayed
faster TFP growth. The econometric results also suggest that spillover effects, R&D and,
to a lesser extent, human capital may have been important drivers of the rate of inno-
vation over the sample period.

JEL Classifications: O47, O32, D24, R11, R12.


Keywords: productivity growth, convergence, innovation, R&D, regional
growth, total factor productivity.

1. INTRODUCTION
The productivity slowdown in the Italian economy is nowadays a wide-
ly recognized fact and it has been for some years at the centre of the debate
among both academics and policymakers.
The rate of growth of GDP per hour worked, which averaged about 2%
over the 1980-1995 period, fell to about 0.5% over the 1995-2004 one. Over
the same time spans, in the EU-15 GDP per hour grew at an average rate of
about 2.4% and 1.5%, respectively: these figures suggest that, although the

1 Maurizio Conti: Dipartimento di Economia e Metodi Quantitativi, University of

Genoa. Via Vivaldi 2, 16126, Genoa, Italy. Tel. ++39(0)10 2095272. Fax ++39(0)102095269.
Email: mconti@economia.unige.it. I thank Giovanni Sulis, Anna Bottasso, an anonymous
referee and an editor for useful comments on an earlier draft of the paper. The usual dis-
claimer applies.
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270 MAURIZIO CONTI

productivity slowdown is an EU-wide phenomenon, the performance of the


Italian economy has been particularly disappointing in the past ten years.
Neoclassical growth theory suggests that, although in the short run cap-
ital accumulation might boost labour productivity growth, over the long run
the latter mainly originates from technical advances and growth in the effi-
ciency of the production process. Total factor productivity (TFP) growth,
which is meant, under some conditions, to represent these effects, grew at
about 0.9% per year over the 1980-95 period in Italy, against an average
growth rate of about 1.2% in the EU-15: however, in the 1995-04 period, TFP
growth declined to -0.4% in Italy and to “only” 0.6% in the EU 15.
These numbers suggest that the dramatic (both in “absolute” and “rela-
tive” sense) fall in labour productivity growth mainly stems from the fall in
TFP growth, with a more limited role played by capital deepening. Daveri -
Jona-Lasinio (2005) show that the decline in labour and TFP growth seems
unfortunately to be pervasive, as it affects virtually all macro-sectors of the
Italian economy (especially agriculture and non-durable manufacturing), al-
though with some notable exceptions, such as the utilities.
Although the widespread decline in labour and TFP growth in the Ital-
ian economy is widely understood and documented and its causes and pos-
sible determinants analysed, I believe that it is not yet clear whether it has
affected in the same way and with the same timing each area of the coun-
try. In fact, while there is a large and growing empirical literature on the ex-
istence of convergence in productivity levels among Italian regions, a thor-
ough analysis on the pattern of labour and TFP growth rates in different sec-
tors at the regional level has yet to be provided.2
Recent empirical analysis has in fact generally found that quite large ef-
ficiency and productivity differentials persist across the Italian regions al-
though there is still conflicting evidence on whether or not a process of con-
vergence has been at work in the past twenty-five years.
To mention just the most recent works, Di Liberto et al. (2008) and Pi-
acentino (2008) have analyzed convergence in TFP. In particular, Di Liberto
et al. (2008) estimate a panel data extension of a conventional growth mod-
el a la Mankiw et al. (1992) using the approach suggested by Islam (1995) to
assess convergence in TFP: by looking at relative regional fixed effects in se-
lected sub-periods as a proxy for regional efficiency differentials, they con-
clude that some convergence in TFP took place over the period 1963-1993.
In turn, Piacentino (2008) regresses TFP levels on its lag plus control vari-

2
An exception is the paper by Brugnoli - Facchin (2004) who do not find convincing
evidence of convergence over the period 1980-95. See also Maffezzoli (2006).
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 271

ables using the Arellano-Bond GMM framework and concludes that conver-
gence over the period 1970-01 took place at a relatively high speed. Similar
results are also found by Maffezzoli (2006) who uses Malmqvist-DEA tech-
niques to compute region specific efficiency scores and then applies con-
ventional OLS-type β convergence analysis finding evidence in favour of con-
vergence, which he attributes only to catching up in efficiency levels.3 Dif-
ferent results are instead obtained by Leonida et al. (2004), who use an ap-
proach similar to that of Maffezzoli (2006) and find convergence in efficiency
levels (i.e. less productive regions were catching up with the efficiency fron-
tier) but divergence in technical change, while overall their results suggest
a divergence process in TFP (see also Byrne et al., 2008).
The existence of strong and persistent productivity differentials across
regions, and in particular along the traditional north-south divide, might
suggest that some careful analysis of the productivity growth patterns at the
regional level might be justified: in other words, in a country like Italy, a uni-
form process of productivity decline should not be taken for granted. Indeed,
the results of this paper suggest that, although with notable differences
across sectors, the decline in TFP growth in the southern regions have been
less evident.
This paper attempts to contribute to the literature on productivity
growth in the Italian regions in a number of ways. First, using growth ac-
counting techniques based on Tornqvist index numbers, the rate of growth
of labour productivity (LP) is decomposed into the contribution of capital
deepening, human capital accumulation and TFP growth. In particular, I
have tried to take into account some of the major shortcomings of growth
accounting techniques, such as capacity utilization and imperfect competi-
tion issues. In second place, I have computed the sectorial TFP levels for the
Italian regions using the multilateral indexes of TFP of Caves et al. (1982),
which are more general than the Cobb-Douglas TFP indexes that are usual-
ly considered in the literature.
The growth accounting results suggest that regional differentials in LP
growth are mostly driven by TFP growth and that the latter has been rela-
tively stronger in the low TFP regions in the south of the country. In order
to shed some light on the different dynamics of TFP at the regional level, I
have combined the growth accounting results with the multilateral indexes
of TFP to estimate an econometric model for TFP growth. The econometric
estimates, consistently with the Neo-Schumpeterian growth theory, suggest

3
Interestingly he also shows that technical change and capital deepening are the ma-
jor forces driving the rightwards shift of the labour productivity distribution over time.
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272 MAURIZIO CONTI

that spillovers and imitation of best practice technologies by regions that are
far away from the technological frontier might have played a potentially im-
portant role in explaining the better TFP growth performance of southern
regions over the sample period.
The remainder of the paper is organized as follows. In section two I will
apply growth accounting techniques to describe LP growth in the Italian re-
gions over the period 1980-2004, as well as the relative role played by TFP
growth and human and physical capital accumulation; in section three I will
explore the dynamics of TFP across Italian regions by computing and dis-
cussing the evolution of multilateral indexes of regional TFP over the sam-
ple period, finding evidence broadly consistent with σ convergence; in sec-
tion four I will estimate an econometric model to gain additional insights on
the link between TFP growth on one side and distance from the frontier,
R&D and human capital on the other. Finally, section five will conclude the
paper. Data issues are discussed in Appendix 1.

2. PRODUCTIVITY GROWTH IN THE ITALIAN REGIONS: A GROWTH ACCOUNTING


EXERCISE

2.1 Labour productivity growth in the Italian regions:


a sector level analysis.
Table 2.1 reports the average growth rates of LP (measured as value
added per standard unit of labour) in the Italian regions over the 1980-04
period as well as in selected sub-periods. As the bottom part of Table 2.1
shows, the (un-weighted) growth rate of value added per worker over the
whole sample period has been slightly higher in the southern regions
(Sardegna, Sicilia, Calabria, Basilicata, Puglia, Campania and Molise ),1.6%
against 1.3%, with Basilicata, Molise, Friuli Venezia Giulia, Marche and
Campania being the best performers and Valle d’Aosta, Sardegna, Lazio and
Trentino Alto Adige the worst ones.
The third and fourth columns of Table 2.1 show two interesting facts.
First of all, LP growth declined in the 1995-04 period in all regions with re-
spect to the 1980-95 one from about 1.9% to about 0.7%. Secondly, the de-
cline is more evident in the centre-north, where the average growth rate de-
clined from 1.8% to 0.6%, while in the south it only declined from 1.8% to
about 1%. The different decline of LP growth along the traditional north-
south divide is however not fully homogenous within the two groups. For
example, the data in Table 2.1 reveal that one southern region as Basilicata
was, together with Friuli Venezia Giulia and Piemonte, among those where
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 273

TABLE 2.1 – Labour Productivity growth decomposition


LP growth Capital Deepening TFP growth Human capital
accumulation
80-04 80-95 95-04 80-04 80-95 95-04 80-04 80-95 95-04 80-04 80-95 95-04
Lig 1.3% 1.6% 0.8% 0.2% 0.2% 0.3% 0.5% 0.8% -0.1% 0.6% 0.6% 0.6%
Pie 1.4% 2.0% 0.2% 0.6% 0.8% 0.3% 0.1% 0.6% -0.6% 0.6% 0.6% 0.6%
Lom 1.4% 2.0% 0.4% 0.4% 0.4% 0.4% 0.4% 1.0% -0.6% 0.6% 0.6% 0.6%
Va 0.9% 1.6% -0.1% 0.5% 0.7% 0.2% -0.3% 0.0% -0.8% 0.7% 0.9% 0.4%
Ven 1.5% 2.0% 0.6% 0.6% 0.6% 0.6% 0.3% 0.8% -0.6% 0.6% 0.6% 0.6%
Taa 1.1% 1.3% 0.8% 1.0% 0.9% 1.1% -0.6% -0.3% -1.0% 0.7% 0.7% 0.7%
Fvg 2.0% 2.7% 0.8% 0.4% 0.5% 0.2% 1.0% 1.6% 0.0% 0.7% 0.6% 0.7%
Emr 1.3% 1.7% 0.7% 0.6% 0.6% 0.6% 0.0% 0.4% -0.6% 0.7% 0.7% 0.6%
Tos 1.3% 1.6% 0.7% 0.5% 0.4% 0.6% 0.2% 0.6% -0.4% 0.6% 0.6% 0.5%
Umb 1.3% 1.8% 0.4% 0.4% 0.4% 0.2% 0.3% 0.7% -0.4% 0.6% 0.6% 0.6%
Mar 1.7% 2.2% 0.9% 0.4% 0.4% 0.4% 0.6% 1.1% -0.2% 0.7% 0.7% 0.6%
Laz 1.0% 1.5% 0.2% 0.5% 0.6% 0.3% -0.1% 0.3% -0.6% 0.6% 0.6% 0.5%
Abr 1.5% 1.8% 0.9% 0.5% 0.6% 0.2% 0.3% 0.5% 0.1% 0.7% 0.7% 0.6%
Mol 2.0% 2.5% 1.2% 0.5% 0.7% 0.2% 0.8% 1.1% 0.4% 0.7% 0.8% 0.7%
Cam 1.6% 2.0% 1.0% 0.6% 0.9% 0.0% 0.5% 0.4% 0.5% 0.6% 0.7% 0.5%
Pug 1.5% 1.8% 1.0% 0.3% 0.4% 0.2% 0.6% 0.8% 0.2% 0.6% 0.6% 0.5%
Bas 2.1% 2.9% 0.9% 0.4% 0.6% -0.1% 1.1% 1.5% 0.4% 0.7% 0.7% 0.5%
Cal 1.7% 1.8% 1.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.6% 0.8% 0.9% 0.6%
Sic 1.2% 1.3% 1.0% 0.6% 0.8% 0.2% 0.1% 0.0% 0.3% 0.6% 0.6% 0.5%
Sar 0.9% 1.0% 0.7% 0.3% 0.4% 0.2% 0.0% 0.0% -0.1% 0.6% 0.6% 0.7%
Mean 1.4% 1.9% 0.7% 0.5% 0.6% 0.3% 0.3% 0.6% -0.2% 0.6% 0.7% 0.6%
Mnn 1.3% 1.8% 0.6% 0.5% 0.5% 0.4% 0.2% 0.6% -0.4% 0.6% 0.7% 0.6%
Mns 1.6% 1.9% 1.0% 0.4% 0.6% 0.2% 0.5% 0.6% 0.3% 0.6% 0.7% 0.6%

Mnn and Mns are the mean values for centre-north and southern regions, respectively.

LP growth declined more sharply; by way of contrast, Trentino Alto Adige


and Liguria were, with most of the southern regions, among those where the
growth rates of labour productivity declined less sensibly. To sum up, our da-
ta suggest that the decline in LP growth that has spurred such a vast debate
among Italian policymakers is indeed a generalized phenomenon.
Although short terms dynamics of productivity may be affected by eco-
nomic cycles, it might be interesting to note that the timing of this decline
has been different among centre-north regions on one side and southern
ones on the other: the decline of LP growth was in fact already evident in
the 1995-00 sub-period and became even worse in the next one in centre-
north regions; in turn, LP growth declined only mildly in the 1995-00 peri-
od in southern regions, and it was only in the 2000-04 one that the fall has
become sizeable.
The data in Table 2.1 also suggest that some convergence might have
happened between centre-north and southern regions in the 1995-04 period,
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274 MAURIZIO CONTI

when the average growth rate in LP growth has been larger in the South, un-
like what happened in the 1980-95 period.
In order to investigate more deeply the pattern of LP growth in the var-
ious sub-periods considered in Table 2.1, I have computed it for five one dig-
it level industries, but focusing on four macro areas, namely north-west,
north-east, centre and south.4
Figures reported in Table A2.1 in Appendix 2 show, for the agriculture,
forestry and fishing (AFF) sector, a decline in the average LP growth over the
period 1995-04 with respect to the 1980-95 one for the north-west and the
centre, and a mild increase in the case of the north-east, with the south dis-
playing a constant average growth rate over the two periods.
In Table A2.1 we note a generalized decline of LP growth rates in the
case of the IND (i.e. manufacturing and utilities) sector in all macro-areas.
Daveri - Jona-Lasinio (2005) who have disaggregated values for the manu-
facturing and the utilities sectors for the Italian economy as a whole, report
a marked acceleration of LP growth in the utilities and, as a result, an even
more significant fall in LP growth in the manufacturing sector. Similarly to
the AFF sector, LP growth was stronger, on average, in northern regions in
the 1980-95 period, while after 1995 regions in the centre and the south have
outperformed those in the north.
In the case of the Construction (CON) sector the data show modest av-
erage rates of growth of LP in all sub-periods. We note that, unlike in the
AFF and IND sectors, the area where LP growth declined more was the
south, where it even turned negative in the 1995-04 period, while in the
north-east it even slightly increased.
The results for the TRD sector (trade, hotel & restaurants, transport &
communications, repairs) suggest a quite similar pattern to that of AFF and
IND: a fall in LP growth rates, mainly concentrated in the centre-north of
the country.
Finally, Table A2.1 suggests that the performance of the FIN sector (fi-
nancial intermediation, professional and business activities) has been par-
ticularly disappointing over the whole sample period, as LP growth rates
have been negative in all areas. Here a different pattern seems to emerge
again between the north and the centre-south of the country, with the per-
formance in the former slightly improving over time, and getting even worse
in the latter in most recent years.

4 Regional level figures are available from the author upon request. Figures for the Oth-

er services (OTH), which groups public administration, education, health and social serv-
ices are not reported given the notorious difficulties in measuring output in that sector.
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 275

2.2 Growth accounting: methodological issues


In this work I measure TFP growth in industry j of region i by means of
a superlative Tornqvist index:
∆ ln TFPijt = ∆ ln Yijt − α ijt ∆ ln Lijt − (1 − α ijt )∆ ln K *ijt (2.1)

where Y, L and K* denote value added, labour input and the smoothed ____cap-
ital stock in industry j of region i at time t (See Appendix A1); in turn αijt de-
notes the two-period average labour share, smoothed with the procedure
outlined in Appendix A1.
The main advantage of using equation (2.1) to measure TFP growth is
that it is derived from a translog production function and, as such, it allows
for a relatively more flexible representation of the production technology
than in the Cobb-Douglas case. However, for (2.1) to correctly measure the
shift of the production function over time, one needs to rely on a series of
assumptions some of which are likely to be violated in practice: first, it is
necessary to assume constant returns to scale in the production technology,
perfect competition in both input and output markets, no externalities as
well as no measurement error.
Notwithstanding the relatively stringent assumptions underlying equa-
tion (2.1), Van Biesebroeck (2007) compared different methods to estimate
TFP levels and growth by means of a Montecarlo study and concluded that,
unless one expects the data to be subject to serious measurement error, the
Tornqvist formula of equation (2.1) provides accurate productivity growth
estimates, notably better than these derived from Data Envelopment Analy-
sis, which is an increasingly popular non-parametric approach that uses lin-
ear programming techniques to envelope observed input-output combina-
tions in order to approximate the production frontier and to separately iden-
tify the contributions of technical change, efficiency catching-up and capi-
tal accumulation to LP growth.
More seriously, TFP growth is calculated in equation (2.1) residually, i.e.
by computing the fraction of output growth which is not explained by in-
puts growth. Therefore, any unmeasured increase in the quality of inputs be-
cause of embodied technical change and/or human capital accumulation,
would eventually show up as a larger residual and, therefore, higher TFP
growth. To correct for the increasing quality of labour, I assume that human
capital enters in the production function in a labour-augmenting way, which
allows me to rewrite equation (2.1) as:
∆ ln TFPjit = ∆ ln Yijt − α ijt ∆ ln( HLijt ) − (1 − α ijt )∆ ln K *ijt (2.2)

where H represents the human capital stock, defined as the returns-to-edu-


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276 MAURIZIO CONTI

cation-weighted years of schooling in each region: Hit = eθ i Eit, where θi is the


region-specific returns to education and Eit is the average years of schooling
in year t and region i (θiEit thus reflects the efficiency of a unit of labour with
E years of schooling with respect to one with no schooling at all): in partic-
ular, the use of a region-specific return to education allows the researcher to
take into account the fact that an extra year of education might differently
affect the wages and, as long as the market for labour is sufficiently com-
petitive, the productivity of similar workers in different regions (see Appen-
dix 1 for further details).
Unfortunately, I can not control for the possibility that technical change
is embodied in new vintages of capital goods, and therefore my TFP growth
estimates will be capturing both embodied and disembodied technical
change.
Rearranging equation (2.2), I can express labour productivity growth as:
Y
∆ ln   = (1 − α ijt )∆ ln( K * / L )ijt + α ijt ∆ ln Hit + ∆ ln TFPjit (2.3)
 L  ijt

The first term on the right-hand-side of equation (2.3) represents the


contribution of capital deepening to labour productivity growth; the second
term is the contribution of human capital accumulation, with the last one
representing TFP growth. Equation (2.3) clearly shows that if human capi-
tal accumulation were not considered, the second term in equation (2.3)
would equal zero and TFP growth would be increased by an equivalent
amount.
An additional refinement of equation (2.3) could be introduced to allow
for imperfect competition in the output market. It can be shown that, when
firms have market power, TFP growth defined as in equation (2.3) incorpo-
rates the effects of departure from marginal cost pricing. To purge TFP es-
timates from the effects of imperfect competition, the input shares in value
added used in equation (2.3) should be substituted by αµ (Hall, 1988 and
Griffith et al., 2004), where µ is the mark-up of prices over marginal costs
computed as explained in Appendix 1.

2.3 THE ITALIAN LABOUR PRODUCTIVITY GROWTH DECLINE: FACTOR ACCUMULATION


OR TOTAL FACTOR PRODUCTIVITY GROWTH?

For the regions as a whole, Table 2.1 reports the LP growth decomposi-
tion computed according to equation (2.3). The first issue that seems to be
clear from Table 2.1 is that the accumulation of human and physical capital
has played an important role over time as a source of LP growth. For ex-
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 277

ample, the average LP growth rate in the 1980-95 period of 1.9% is the re-
sult of 1.3 percentage points that can be attributed to capital accumulation
(0.7% to human capital and 0.6% to physical capital) and 0.6 percentage
points that can be ascribed to TFP growth instead (i.e. about 31%).
The contribution of capital deepening is roughly equal in the north and
in the south notwithstanding a quite different behaviour of employment over
the sample period: in fact, total employment grew relatively more in north-
ern regions, suggesting that the capital stock grew more rapidly in the north
than in the south.5 The relatively large contribution of human capital accu-
mulation highlights that neglecting it might be misleading: in this applica-
tion it would tend to about double the average TFP growth rate over the sam-
ple period.
Focusing on TFP growth, we can note that there are not major differ-
ences between average TFP growth in centre-north and southern regions
over the 1980-95 period. All in all, after accounting for the impact of human
capital accumulation, the role played by TFP growth is not large, although
it is still sizeable, especially in regions such as Basilicata, Lombardia,
Marche and Molise, where the average yearly growth rate was equal or big-
ger than 1%.
In the 1995-04 period we already know that the LP growth rate plum-
meted at about 0.7% on average (with a better performance in the south).
As the results clearly show, the contribution of capital deepening fell to about
0.3% while that of human capital stayed about constant: as a result, TFP
growth instead went down from about 0.6% to about -0.2%: this suggests
that, on average, 0.8 out of 1.2 percentage points (i.e. 2/3) in the average fall
of LP growth can be attributed to TFP.
There are however quite sizeable differences across regions, and in par-
ticular along the north-south divide. For example, in the south the contri-
bution of capital deepening went down from 0.6% to 0.2%; by way of con-
trast, in the centre-north the capital deepening contribution fell only from
0.5% to 0.4%: as a result, TFP growth fell from 0.6% to 0.3% in the south
and from 0.6 to -0.4 in the north of the country. This suggests that, unlike
what one could expect from a conventional Solow growth model, the con-
tribution of capital deepening was not stronger in the south: in fact, it was
the south’s higher TFP growth to account for its faster average LP growth
over the 1995-04 period. Unfortunately, this improvement in the south rela-
tive TFP performance did not stem from an acceleration in the south but

5 Alternatively, one might think that the capital share increased more in the north than

in the south, but using our data on the smoothed labour share (see equation (A1.1)) we do
not find evidence consistent with this hypothesis.
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278 MAURIZIO CONTI

rather from a sharper deceleration in the centre-north: in particular, the de-


celeration was particularly severe in the North-West of the country (with the
exception of Liguria) as well as in Lazio and Emilia; in turn, TFP growth was
positive everywhere in the south and in regions such as Calabria, Sicilia and
Campania it did not even slow down.
Another way to consider this issue is to compute the differential in the
rate of growth of LP for southern and centre-northern regions in 1980-95 and
1995-04: in the first period, LP grew only 0.1 percentage points faster in the
south, but the differential increased in 1995-04 to 0.5 percentage points. This
positive differential of 0.4 percentage points can be entirely ascribed to a bet-
ter performance in TFP growth in the south, as the south/centre-north dif-
ferential grew from zero to 0.8 percentage points. By way of contrast, the dif-
ferential in the capital deepening contribution went down from 0.1 to -0.2
percentage points, reflecting the disappointing performance of capital ac-
cumulation in the south: in other words, while TFP growth is usually not the
major component of LP growth within a single region, it is generally the ma-
jor cause of changes in LP growth differentials across (groups of) regions.
The major results for TFP growth that I have discussed so far are robust
to the correction for imperfect competition using the mark-up adjusted
labour shares. In fact, with that correction the average Italian TFP growth
would go up by about 0.2 percentage points in the 1980-04 period, thus not
substantially altering the picture I have just drawn.
Tables A2.1 in Appendix 2 reports the LP growth decomposition for the
sub-sectors in the four macro-regions. As far as the AFF sector is concerned,
one may note that the contribution of human capital to LP growth has re-
mained essentially stable over the sample period; in turn the contribution of
capital deepening has slightly declined in the 1995-04 period, especially in
the centre-south. In general, TFP growth has been the main determinant of
the LP growth dynamics in the AFF sector: in particular, the relatively good
LP performance in the AFF sector in the north-east and the south is to be
mainly ascribed to the relatively high TFP growth rates.
The IND sector portrays a similar picture, as also in this case the LP
growth decline is to be mainly attributed to TFP growth.6 As far as the con-
tribution of capital deepening is concerned, we can note that although it has
declined everywhere, it has remained positive. Similar conclusions can be
drawn by considering the remaining sectors. In particular, the construction
sector has been characterized in virtually all regions by negative (and de-

6 With the mark-up correction, in the 1995-04 period the decline in TFP growth would

be slightly sharper.
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 279

clining) growth rates of TFP in all periods; in turn, the capital deepening con-
tribution has been quite volatile across sub-periods, with some regions
where it accelerated in the 1995-04 period (especially in the centre-north)
and others where it declined (especially in the south). As far as the TRD sec-
tor is concerned, it may be observed that TFP growth has been very small or
even negative for most regions throughout all sub-sample periods and that
it slowed down even more in the post 1995 period,7 with the exception of the
southern regions; in turn, capital deepening has remained a positive con-
tributor to LP growth and in the north-east it even accelerated in the 1995-
04 period. Finally, in the FIN sector the negative growth rates of LP growth
mainly originate from a negative contribution of capital accumulation, while
TFP growth has been either positive or slightly negative (with perhaps the
exception of the centre) although declining as in the rest of the economy,
with the exception of the south.8
The main results of this growth accounting exercise can be summarised
as follows. First, the decline in LP growth after 1995 has been a widespread
phenomenon, affecting all sectors in virtually each area of the country; in
second place, there is clear evidence that TFP growth in the south, though
declining, has accelerated relatively to the northern regions after 1995; third,
the better performance of LP growth in the south after 1995 seems to have
been mainly due to its higher TFP growth rates, which in turn may be in-
dicative of a convergence process in productivity mainly driven by a tech-
nological catch-up of the southern low productivity regions (see also Maf-
fezzoli, 2006); finally, in some sectors and regions (mainly northern) did not
only TFP growth slow down, but it even turned negative.
Both the negative TFP growth rates in the north after 1995 and the rel-
ative acceleration in TFP growth in the south deserve some additional dis-
cussions. TFP growth, under neoclassical assumptions, is a measure of tech-
nical change and, therefore, it is not immediately clear why, at given capi-
tal-labour ratios, technical change may contribute negatively to LP growth
(Maffezzoli, 2006). However, if we relax some of the most restrictive neo-
classical assumptions, negative TFP growth may be explained with the oc-

7 With the mark-up correction, average TFP turns out to be positive (0.2% over the
whole sample period); in turn, the decline in the 1995-04 period is about 0.5 percentage
points.
8 This is the sector where the mark-up correction makes more difference, given the rel-

atively high mark-ups in many regions: in this case TFP growth has been even more nega-
tive throughout the whole sample period in all regions. This is mainly because a much high-
er labour share tends to give much more weight to the positive contribution of human cap-
ital accumulation (see equation (2.3)), thus depressing the residual TFP growth.
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280 MAURIZIO CONTI

currence of increasing slack in the use of existing technologies or, perhaps


more likely, with adjustment and adoption costs.
By way of example, investments in new technologies (e.g., ICT) may re-
quire time before their potential is fully understood by managers, incorpo-
rated into the companies’ routines and finally exploited in the production
process; however, the adjustment costs they entail (in terms of adjustment
of the firm structure and reorganization of the production process) may be
far from trivial and, in the short run, they may well contribute negatively to
labour productivity growth. As long as ICT investment has been stronger in
the past ten years in the north, adjustment and adoption costs might be a
possible explanation of the divergent pattern in TFP growth between north-
ern and southern regions which has been identified in the growth account-
ing exercise.
Moreover, Arnold et al. (2008), using OECD data, note that the negative
effects of anti-competitive product market regulations are mainly concen-
trated in ICT-using sectors and particularly pronounced on these firms that
are not far from the international best practice frontier: as long as these high
TFP firms are mainly concentrated in the centre-north of the country, one
may well argue that product market regulations may have had a lighter neg-
ative impact on TFP growth in southern regions.
Furthermore, given the larger role played by exports in the economic
structure of northern regions, it may also have been the case that the impact
of globalization (and in particular the intensified competition from low –
cost countries) has spurred much more competitive pressures on northern
firms, forcing significant restructuring processes that, in the short run,
might have been associated to lower productivity growth.
Also structural change and composition effects may be related to the
north-south differentials in TFP growth: although the better performance in
the south after 1995 is widespread across sectors, their highly aggregated na-
ture does not rule out the possibility that, within each sector, relatively back-
ward southern regions may have reallocated production factors towards rel-
atively high TFP level or TFP growth sub-sectors. However, it should be not-
ed that Bernardini Papalia - Bertarelli (2009) used a shift-share approach to
argue that the sector level composition has played a decreasing role since the
end of 1980s in driving regional LP differentials in Italy; in turn, Lodde
(2007a) found evidence consisting with some increase over the past twenty
years in the presence of clusters of high-tech manufacturing industries in the
south of Italy.
Moreover, Dew-Becker - Gordon (2008) have found, for a panel of OECD
countries, a robust significant negative correlation between labour produc-
tivity growth and growth in employment per capita which, they argue, can
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 281

explain a non-negligible portion of the LP growth decline in countries such


as Italy and Spain, where hours worked per capita grew more after 1995. 9
Although it is not immediately clear whether their finding could be extend-
ed to TFP growth as well, they note that a possible explanation of their re-
sult is that marginal workers tend to be less skilled and experienced, such as
females with poor or no previous work experience and immigrants. For ex-
ample, if new workers have fewer skills, because on average less experienced,
or because they are immigrants from very low-income countries (who may
be less educated but also lack general skills, such as the Italian language)
then this would not be captured in our human capital correction and it
would eventually show up as a lower Solow residual. Some facts that have
occurred in the Italian labour market in the past ten years are consistent
with this hypothesis: first, employment and the female participation rate
have grown more in the north (essentially for an increase in the labour force
participation of low educated females, which might have been due, to a cer-
tain extent, to women that re-enter the labour market after maternity, which
may have entailed a loss in skills, experience, etc.) and, secondly, the pro-
portion of immigrants in the total population has in the past decade grown
less in southern regions.
Additional explanations of the turnaround in TFP growth after 1995
might also be found in the implementation of different policies and legisla-
tions at regional level, or in the effectiveness of development policies such
as the EU Structural funds (see Loddo, 2006).
Finally, consistently with the Neo-Schumpeterian Growth Theory, less
technologically advanced regions (mainly located in the south) may have fos-
tered their TFP growth not only by innovating, but through spillovers and
imitation of the best practice technologies already introduced in the frontier
regions.
In the next section I will compute TFP level indexes to get additional in-
sights on the cross sectional dispersion of TFP levels over the sample peri-
od and then I will explore the technological convergence hypothesis by esti-
mating an econometric model to assess the link between TFP growth rates
and distance from the technology frontier, R&D and human capital.

9 As far as recent developments in the labour market are concerned, Boeri and Garibal-
di (2007) present a model that shows how the sort of two-tiers labour market reforms in-
troduced in Italy after 1997 are likely to induce a reduction in labour productivity and a fall
in its cross sectional dispersion, and also provide some micro-level data for Italy consistent
with their model’s main predictions.
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282 MAURIZIO CONTI

3. TOTAL FACTOR PRODUCTIVITY LEVELS: WHAT HAPPENED IN THE PAST 25 YEARS?

3.1 Methodology
In order to compare total factor productivity levels across regions I do
not rely, as it is common in the applied literature, on a Cobb-Douglas pro-
duction function. I adopt instead the Caves et al. (1982) multilateral index
of TFP, which is a superlative10 index number derived from the translog pro-
duction function, that has been recently used by Griffith et al. (2004) and
Arnold et al. (2008).
This index is built by evaluating the TFP of a given region relative to the
geometric mean of TFP in all other regions, which ensures the important
property of transitivity, thus making the choice of base region inconsequen-
tial:11
Yijt HLijt K *ijt
ln TFPjit = ln( ) − σ ijt ln( ) − (1 − σ ijt ) ln( ) (3.1)
Y jt HL jt K * jt
where Y jt , HL jt , K * jt are the geometric means of value added, human-cap-
ital-adjusted labour and capacity-adjusted capital stock in industry j at time
1
t, respectively. In turn, the variable σ ijt = (α ijt + α jt ) is the average between
2
the (smoothed) labour share and the geometric mean of the (smoothed)
labour share in industry j at time t.12

10 An index number formula is called exact when it can be derived from an underlying

production function. In turn, if that underlying production function is also flexible (i.e. a
second order approximation to an arbitrary unknown functional form, such as the translog),
then the index is called superlative.
AB = TFPAC × TFPBC,
11 For any three regions A, B and C, the TFP index is transitive if TFP

i.e. if relative TFP between region A and B does not change if the comparison is direct or
through any other region in the dataset (by way of example, if firm A produces 20% more of
firm B (given inputs usage), and firm B produces 10% more than firm C, then the transitiv-
ity property ensures that firm A produces 32% (1,1 × 1.2=1.32) more than firm C). The tran-
sitivity property is ensured in the Caves et al. (1982)’ Multilateral Index of TFP by measur-
ing each region’s TFP relatively to a common reference point (the geometric mean of all re-
gions). The issue of transitivity can be neglected under a Cobb-Douglas production technol-
ogy because it can be shown that if the labour and capital shares are assumed to be invari-
ant across regions the Multilateral Index of TFP of Caves et al. (1982) reduces to the relative
TFP index derived from a Cobb-Douglas technology (see Harrigan (1999) for a simple proof).
12 As the averages are taken for each year and not across all years in the sample, the

TFP levels should not be compared over time (as they are expressed relatively to the geo-
metric mean in each year); however their dispersion or average distance from the best prac-
tice technology can be compared over time.
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 283

Being derived from a translog production function, the TFP levels com-
puted as in equation (3.1) are more general than those derived from a Cobb-
Douglas production function: in fact, it can be shown that they can be de-
rived from a constant returns to scale translog production function with
some heterogeneity in production technologies across regions (limited to the
first order coefficients that can be region specific, unlike second order terms
which are assumed to be equal across regions by assumption). Moreover, ac-
cording to the Montecarlo studies reported in Van Biesebroeck (2007), TFP
levels computed as in equation (3.1) are generally robust, especially in the
presence of heterogeneous technologies. Finally, although Van Biesebroeck’s
Montecarlo study shows that DEA outperforms the Caves et al.’s index of
TFP in some instances as a level accounting methodology, there is also to
keep in mind that, in small samples, DEA tends to put each unit “under the
best possible light”: in other words, DEA tends to compare each unit only
with a subset of units that are “similar” to the unit under analysis: in small
samples chances are therefore high that a given region might be considered
nearly or fully efficient, when in fact it is just “different” from the other re-
gions in the sample (Daraio - Simar, 2007).

3.2 Results
In this section I analyse TFP levels and I provide some evidence on the
TFP convergence debate in Italy.
In particular, in this section I will assess whether the data reveal any ten-
dency in the cross sectional dispersion of TFP levels to shrink over time (σ
convergence). Tables A2.3 and A2.4 in Appendix 2 report the exponential of
TFP levels for each region for the economy as a whole and for the main five
sub-sectors for selected years computed according to equation (3.1).
The results confirm, both at the aggregate and at the sector level, that
the centre-north regions have higher TFP levels than southern ones and that
the differentials seem to slightly shrink over the sample period,13 the only
exception being the AFF sector, which is also that where the TFP differen-
tial appears to be the largest.
This empirical evidence may be broadly suggestive of the fact that the
better TFP growth performance of southern regions in the 1995-04 period
might indeed reflect a convergence process in relative TFP levels. As of 2004,
Lombardia is in the top four regions in all sectors but construction, while

13 To check the robustness of relative TFP levels, I have computed the rank correlation

coefficients between my TFP levels in 1990 and those computed by Di Liberto et al. (2008)
for the period 1981-93 which turns out to be 0.88.
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284 MAURIZIO CONTI

Lazio and Liguria appears in the top four regions four and three times re-
spectively.
By way of contrast, Calabria is among the worst four in all sectors but
construction. Looking back at 1980, it might be observed that the 2004 best
performers (i.e. Lombardia, Liguria and Lazio) were generally already at the
top of the rankings, while I found that some of the worst performers in 1980,
such as Basilicata, are no longer among the worst four as of 2004. The stan-
dard deviation of TFP levels suggests that, in general, there is some evidence
of a reduction over time in the dispersion of TFP, a fact which is broadly sug-
gestive of σ convergence, although essentially because of the fall in the stan-
dard deviation after 1995.14
Construction stands up as the only sector where there is instead evi-
dence of a process of σ divergence going on, with the standard deviation go-
ing up from 17 to about 22. Tables A2.3 and A2.4 also show that Construc-
tion and the AFF sectors are, by far, those with the persistently highest dis-
persion in TFP, unlike what one may have thought, given their relatively low-
tech nature.
Why this is the case is not immediately clear and it would probably de-
serve some additional analysis with more disaggregated, possibly firm-level,
data, even if composition effects may have played a role in yielding lower
TFP dispersion in the other, more heterogeneous, sectors; alternatively, con-
struction and agriculture may be the sectors where the occurrence of illegal
work may be thought to be the most severe in Italy and this might have gen-
erated some distortions in the recorded statistics in those sectors.
Additional evidence in favour of σ convergence is provided by Figures
A2.1 - A2.6 in Appendix 2, where I report Kernel density estimates of regional
TFP levels for the economy as a whole and for the five sub-sectors.15 For the
AFF and IND sectors one may note that the tail of the distribution is thin-
ner in 2004 than in 1980, which suggests that there are fewer regions in the
tails of the TFP distribution and that a higher number of regions are con-
centrated around the sample mean.
A similar pattern can be identified also in the case of the FIN sector,
where the TFP distribution tends to shrink – suggesting again σ conver-
gence – and to become unimodal from bimodal. In the TRD sector there is

14 If we take into consideration the mark-up correction, main results are not affected,

although the centre-north south TFP differential slightly shrinks (at the overall level, the
standard deviation falls from 9 to 6 with the mark-up correction, against a drop from 10.8
to 8.5 without the mark-up correction).
15 Sample year means of TFP levels are equal to 100 by construction. Therefore we

should not expect any rightward shift of the TFP distribution over time.
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 285

again evidence of convergence but also the tendency towards a bi-modal dis-
tribution, which suggests the existence of σ convergence clubs. By way of
contrast, in the CON sector a clear pattern is not easily identifiable.
Finally, at the aggregate level there is clear evidence of σ convergence
and the tendency towards a bimodal distribution.

4. TFP GROWTH DETERMINANTS: WHAT DOES A NEO-SCHUMPETERIAN GROWTH


MODEL SUGGEST?

4.1 Theoretical Background


It has recently been argued (Aghion and Howitt, 2005) that the Neo-
Schumpeterian growth theory may provide an useful theoretical framework
to better understand the different patterns of productivity growth in ad-
vanced economies.
Referring to Aghion and Howitt (2005) for an in depth discussion, the
Neo-Schumpeterian paradigm has made it clear that the rate of growth of
productivity in a given country depends, among other factors (such as the
intensity of competition), on the resources invested into the innovation
process (namely, R&D expenditure and investments in human capital) in
that country and, as long as technology can flow unfettered across space, on
the introduction of innovations in the country(ies) at the technological fron-
tier (through knowledge spillovers). In particular, regions that are far away
from the technological frontier (as measured by relative TFP levels) should
experience a faster growth in productivity because they can promote it not
only through their own innovation efforts (e.g. R&D spending), but also
through imitation and adoption of the best practice technologies available
in the market.
Griffith et al. (2000) present a general equilibrium endogenous growth
model which is capable of generating theoretical predictions consistent with
those briefly sketched above, namely the TFP growth enhancing effect of
R&D and the potential for technology transfer depending on the distance
from the technology frontier. In particular, the paper develops an overlap-
ping generation version of the Aghion - Howitt (1992) model, where im-
provements in the rate of growth of the intermediate goods’ quality or pro-
ductivity (which in turn are the responsible for the increases in TFP growth
in the final goods sector) derive from R&D investments and, for non-fron-
tier countries, also from technology transfers from the frontier country.
In the recent empirical literature the main predictions of the Neo-
Schumpeterian growth theory have been brought to the data by estimating
empirical models in line with the following equation:
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286 MAURIZIO CONTI

TFPijt −1
∆ ln TFPijt = β1∆ ln TFPFjt − β2 ln + χ X it −1 + uij + tt + vijt (4.1)
TFPFjt −1

In equation (4.1) TFP growth in a particular sector j = 1,..5 of a given re-


gion i = 1,..20, at time t = 1,….25 is allowed to be positively affected by re-
sources invested in R&D and in human capital (both captured by the vector
X) in that region; furthermore, TFP growth in the frontier region (∆lnTFPFjt)
may cause faster TFP growth in non-frontier regions because it expands the
production possibility set; finally, the speed of diffusion of technology is a
function of the distance from the technology frontier, captured by the (log)
difference between the TFP level at the frontier and the TFP level of region
  TFPijt −1  
i  ln  = GAPijt −1 : since GAPijt – 1 is a negative variable by construc-
  TFPFjt −1  
tion (because TFP in a non-frontier region lies below the level of the fron-
tier), a more negative value for GAPijt – 1 is expected to be associated with a
faster rate of TFP growth in non-frontier regions. In particular, β1 captures
the instantaneous effect of changes in frontier TFP growth on TFP growth
in non-frontier regions, while β2 captures the rate of technology diffusion.
In equation (4.1) uij is a set of region-sector fixed effects that proxy for
time invariant effects capturing unobservable region and industry specific
characteristics, potentially correlated with regressors, such as permanent
differences in industrial specialization across region-sector combinations
(e.g. the relative importance of high-tech in the industry sectors of different
regions) or differences in technologies or policies across industry-region
pairs; tt is a full set of time effects which capture common macroeconomic
shocks and vijt is the idiosyncratic error term.
Griffith et al. (2004) note that equation (4.1) can also be considered as
an equilibrium correction mechanism (ECM) which can be derived starting
from the following auto-regressive distributed lag model for regional TFP:
ln TFPijt = α1 ln TFPijt −1 + α 2 ln TFPFjt + α 3 ln TFPFjt −1 + eijt (4.2)

Assuming long-run homogeneity (i.e. 1 – α1 = α2 + α3)16 and rearranging,


equation (4.2) can be re-written as:
TFPijt −1
∆ ln TFPijt = α1∆ ln TFPFjt − (1 − α1 ) ln + eijt (4.3)
TFPFjt −1

16The assumption of long run homogeneity simply reflects the hypothesis that a one
per cent increase in TFP in the frontier region would eventually translate, in the long run,
into a one per cent increase in TFP in non-frontier regions: in other words, in the long run
an innovation in the frontier region would be entirely diffused to non-frontier ones.
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 287

Equation (4.1) is nothing else than equation (4.3) augmented with the
vector X, which captures the productivity enhancing effect of R&D and hu-
man capital. The interpretation of equation (4.3) as the equilibrium correc-
tion representation of equation (4.2) makes it clear, among other things, that
the coefficient on TFP gap (1 – α1) measures the speed of convergence to the
long run steady state level of TFP.
It might be noted that the model implied by equation (4.2-4-3) predicts
convergence in relative TFP (meaning that regions with the initial lower lev-
els of relative TFP would tend to experience faster growth in relative TFP)
conditionally to the long run steady-state determinants of relative TFP, such
as the rate of innovation, which in turn depends on fixed characteristics of
regions and sectors as well as on investments in R&D and human capital
(Griffith et al., 2004).
Previous empirical works (Griffith et al., 2004, Cameron et al., 2005,
Nicoletti - Scarpetta, 2003 and McMorrow et al., 2009) have estimated var-
ious versions of equation (4.1) using panel data of different sectors in vari-
ous OECD countries and have generally found that TFP growth depends pos-
itively on the distance from the technology frontier, on the rate of TFP
growth in the frontier country and on R&D while, as far as the impact of hu-
man capital is concerned, the findings tend to be mixed.

4.2 ECONOMETRIC ESTIMATES

The estimation of equation (4.1) presents a series of econometric chal-


lenges.
First, as argued above, there might be unobserved (time invariant) het-
erogeneity in the determinants of TFP growth (the uij) which may be corre-
lated with the explanatory variables, potentially biasing parameter estimates
if not properly accounted for. In order to control for this, equation (4.1) is
estimated by the within group (least square dummy variable) procedure,
which removes time invariant heterogeneity by including a full set of region-
sector dummies (or, equivalently, by using the within transformation) and
yields parameter estimates that are robust to unobserved region-sector fixed
effects potentially correlated with included regressors.
In some regressions (see Table 4.1) I also include a full set of region-spe-
cific time trends that may proxy, among other things, for unobserved devel-
opments in region specific determinants of TFP growth – potentially corre-
lated with the included regressors – which, if not controlled for, may cause
parameter estimates to be inconsistent.
Third, notwithstanding the use of the within group estimator, R&D and
human capital stocks may be jointly determined with TFP growth (Xit – 1 may
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288 MAURIZIO CONTI

be correlated with vijt): in this case, the within group estimator does not de-
liver consistent parameter estimates and the implementation of an instru-
mental variable procedure, after taking out the region-sector fixed effects
through the within transformation, is necessary, using appropriate lags of
the endogenous variables as instruments.17 A simple within group two-stage
least square (WG-2SLS) estimator would deliver consistent parameter esti-
mates; however, WG-2SLS parameter estimates are efficient only in the case
of homoskedastic disturbances: as a result, I have preferred to estimate re-
gression specifications that include R&D and human capital stocks with an
efficient within group GMM procedure (WG-GMM) which delivers more pre-
cise estimates than WG-2SLS under heterosckedasticity. However, I would
like to point out that none of my main results hinge upon the use of the WG-
GMM rather than the WG-2SLS estimator, although the former does yield
somewhat more precise parameter estimates in this empirical application.
The main objective of this section is to ascertain whether the occurrence
of a catching up process in TFP among Italian regions has been indeed at
work over the sample period (1980-2004) considered in this paper. In order
to do that I will first start with a parsimonious specification of equation (4.1)
that includes the TFP Gap variable as the only TFP growth determinant; I
will then expand that specification testing the robustness of the catching up
effect to the inclusion of TFP growth in the frontier, regional specific time
trends, sector-year fixed effects, R&D capital and, finally, human capital.
All estimated regressions are reported in Table 4.1.18 As I said above, I
start in column 1 with the most parsimonious specification of equation (4.1):
as we can see, the coefficient of the GAP variable is negative and statistical-
ly significant; because GAP is a negative variable by construction, this means

17 Using longer lags of the potentially endogenous variable is valid provided that the

Sargan test does not reject the overidentifying restrictions and serial correlation is not pres-
ent in the data: the latter was checked through the Arellano-Bond test for serial correlation
but also with the serial correlation test for panel data suggested in Wooldridge (2002) (and
also discussed in Drukker, 2003) that yield very similar results in all regression equations.
Moreover, removing the unobserved heterogeneity via the within transformation and in-
strumenting the endogenous variables with their lags is justified because of the sufficient-
ly long time span (T ≥ 20) of the data in this application (Arellano, 2003 and Griffith et al.,
2004).
18 Standard errors are clustered at the regional level to allow for common shocks af-

fecting sectors belonging to the same region arising, for instance, from policies conducted
by regional governments. Furthermore, some variables used in some specifications are de-
fined at the region rather than at the region-sector level: in this case, conventional standard
errors of those variables (namely R&D and human capital stocks) might be downwards bi-
ased.
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 289

that an increase in the distance from the frontier region (i.e. a more nega-
tive value of GAP) is associated to an increase in TFP growth. The magni-
tude of the coefficient is such that a one standard deviation increase in the
distance from the technological frontier (which, for the economy as a whole,
was about 10.6 in 1995) would be associated to an additional 1.6 percentage
points in TFP growth (see Griffith et al. (2004) for a similar result).
In column 2 the previous regression is augmented with the inclusion of
TFP growth in the frontier region, which is however not statistically signif-
icant, while the coefficient of the GAP variable is virtually unaffected.
In column 3 a full set of region-specific time trends is added to the base-
line specification (i.e. column 2): their inclusion may be important because
they can control for the impact of any unobserved changes at the regional
level in public policies (e.g. differences in the liberalization process in the
service sector), in the industry specialization (e.g. more or less based on ex-
ports, etc.), in the EU structural funds, in the patterns of structural change,
in the skills of the labour force, etc. As we can see, the evidence in favour of
a convergence process in TFP, whereby regions far away from the frontier
tend to display a stronger rate of TFP growth, is confirmed, as the coefficient
of the GAP variable is remarkably stable.
In column 4 I augment the previous specification allowing for the year
effects to be different across sectors by including a full set of sector-year fixed
effects which proxy for sector-level yearly shocks to TFP: the coefficient of
the GAP variable is always negative, statistically significant and tends even
to slightly increase in absolute value.
In the previous specifications I assumed that the coefficient of GAP is
homogenous across sectors. In column 5 I instead allow for a sector specif-
ic coefficient by interacting GAPijt – 1 with sector dummy variables: regression
results show that all sectors display a negative coefficient, suggesting that
some convergence in TFP might have taken place in all sectors, with perhaps
the exception of the FIN sector, as I can not reject the null hypothesis that
its coefficient is equal to zero. According to the estimates reported in column
5, the speed of convergence seems to have been particularly strong in the
AFF sector, followed by IND, CON and TRD. It may be interesting to note
that the coefficient of TFP growth in the frontier region is now positive and
marginally significant at the 10% level.
The empirical evidence discussed so far seems to be consistent with the
occurrence of a catching up process over the sample period. However, one
possible pitfall of the econometric specifications reported in columns 1-5 is
that GAP has always been considered exogenous. Nevertheless, the likely ex-
istence of measurement error problems in TFP (and therefore in the distance
from the frontier) may suggest that GAP is in fact endogenous in equation
GDE-03_VOLAUK@0269-0310#.qxd 3-11-2009 13:28 Pagina 290

290 MAURIZIO CONTI

(4.1). In column 6 I have therefore tested the robustness of previous results


by re-estimating a specification identical to that in column 4 but addressing
possible endogeneity concerns of GAPijt – 1. This was done by using a WG-
GMM procedure, using GAPijt – 2 and GAPijt – 3 as instruments: as we can see,
the coefficient of GAP drops somewhat but it is still statistically significant
at the 1% level, while the Sargan test does not reject the null hypothesis of
the validity of the instrument set. When using an instrumental variable pro-
cedure, it is important to test whether the instruments suffer of the “weak
instrument” problem: in fact, when instruments are weak (i.e. poorly corre-
lated with the endogenous variable), IV estimators tend to deliver parame-
ter estimates that, in small samples, are biased towards the OLS ones. In this
application, the F tests of the excluded instruments in the first stage regres-
sion is highly significant, well above the “safe” value of 10 that Staiger - Stock
(1997) suggest as a benchmark and, furthermore, both GAPijt – 2 and GAPijt – 3
are statistically significant in the first stage regression: this suggests that the
instruments used in this application are probably not “weak” and therefore
parameter estimates may not be likely to suffer of weak instruments prob-
lems.
In column 7 I have included in the regression the log of R & Dit – 1. Be-
cause data on R&D expenditure are defined only at regional level we should
interpret the coefficient of R & Dit – 1 as the impact of the region-wide R&D
stock on sector level TFP growth (which therefore incorporates also any
“within region” externalities associated to the R&D stock). Because shocks
to the economic environment (vijt) can feedback into the firm’s R&D deci-
sions, R & Dit – 1 is likely to be endogenous, with the direction of the bias that
is not necessarily clear a priori: in particular, firms might react to a positive
shock to TFP growth expanding its R&D capital stock, which would give rise
to an upwards bias in the coefficient of R & Dit – 1; however, during reces-
sions, when measured TFP growth tends to be lower, some regional govern-
ments may boost their support to companies’ investments (including R&D
spending) through tax breaks and grants, which in turn might give rise to a
downwards bias to the R&D coefficient. For these reasons it is likely that
R&D stock is endogenous in this empirical application, and it is therefore
necessary to instrument it, as I have done using R & Dit – 2 and R & Dit – 3 as
instruments.19 The econometric estimates in column 7 show that the coeffi-

19This identification strategy allows for the possibility that E(ReDit – 1vijt) ≠ 0 (i.e. a con-
temporaneous shock to TFP growth could be correlated with R & Djt – 1 because firms may
be able to predict shocks to TFP one period-ahead and adjust their R&D decision accord-
ingly) but does require that E(ReDit – svijt) = 0: s ≥ 2 in this case, the use of the R&D stock
lagged twice or more should eliminate possible endogeneity biases.
GDE-03_VOLAUK@0269-0310#.qxd
TABLE 4.1 – TFP Growth and Distance from the frontier. Regression results
Dependent 1 2 3 4 5 6 7 8 9
variable: WG WG WG WG WG WG – WG – WG WG
∆lnTFPijt GMM GMM GMM GMM
∆lnTFPFjt – 0.067 0.071 0.052 0.080* 0.102** 0.182*** 0.186*** 0.185***
(0.052) (0.051) (0.067) (0.048) (0.050) (0.045) (0.038) (0.046)

THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA


GAPijt -0.0013*** -0.0014*** -0.0015*** -0.0018*** -0.0011*** -0.0011*** -0.0011*** -0.0011***
(0.0002) (0.0002) (0.0002) (0.0003) (0.0002) (0.0001) (0.0001) (0.0001)
RDit-1 - - - - - - 0.019** 0.019*** 0.019**
(0.007) (0.0065) (0.085)
HCit-1 - - - - - - - 0.015
(0.090)

3-11-2009
UNIVFit-1 - - - - - - - - 0.042
(0.285)
∆UNIVFit-1 - - - - - - - - 2.1422*
(1.32)
GAPAFFijt - - - - -0.0019*** - - - -
(0.0004)

13:28
GAPINDijt - - - - -0.0014*** - - - -
(0.0003)
GAPCONijt - - - - -0.0011*** - - - -
(0.0002)

Pagina 291
GAPFINijt - - - - -0.0002 - - - -
(0.0002)
GAPTRDijt - - - - -0.0007***- - - -
(0.0002)
Serial correlation 0.16 0.16 0.16 0.18 0.16 0.20 0.14 0.14 0.14
(p value)
Sargan test (p val.) - - - - - 0.60 0.44 0.61 0.39
Region-sector Yes Yes Yes Yes Yes Yes Yes Yes Yes
fixed effects
Year effects Yes Yes Yes No Yes Yes Yes Yes Yes
Regional time No No Yes Yes Yes Yes Yes Yes Yes
trends
Sector-year No No No Yes No No No No No
fixed effects
GAPijt endogenous No No No No No Yes Yes Yes Yes
R&Dit endogenous - - - - - - Yes Yes Yes
Human capital - - - - - - - Yes Yes
endogenous

291
Standard errors are robust to heteroskedasticity and to cluster correlation within regions. All regressions include region-sector fixed effects and time effects.
Models 3-10 include also region-specific time trends. Model 4 includes sector-year fixed effects. ***= sign. at 1%; **= sign. at 5%; *= sign. at 10%. The serial
correlation test is the Arellano-bond test for serial correlation and Sargan is the test for overidentifying restrictions. The number of regions, sectors and years
is 20, 5 and 25 (21 if the R&D stock is used), respectively. Excluded instruments: GAPt-2 and GAP t-3 in column 6-9, R&D t-2 and R&D t-3 in column 7-9, HC t-2
and HC t-3 in column 8; UNIVF t-3 and UNIVF t-4 in column 9. Sample size is 2500 region-sector-year observations (2100 when R&D capital is used). TFP re-
lated variables include a correction for human capital in all specifications. All regressions run with the routine XTIVREG2 for STATA.
GDE-03_VOLAUK@0269-0310#.qxd 3-11-2009 13:28 Pagina 292

292 MAURIZIO CONTI

cient of R&D capital is positive and significant at the 5% level of signifi-


cance,20 suggesting that the level of R&D capital may have played a poten-
tially important role in driving TFP growth over the sample period. Inter-
estingly, the coefficient of TFP growth in the frontier region goes up and it
is now statistically significant at 1%, suggesting that spillovers effects may
be important (McMorrow et al, 2009), while the coefficient of the GAP vari-
able is still negative, statistically significant, and with a similar magnitude
to that identified in the previous specifications.21 Griffith et al. (2004) have
found that the effect of R&D on TFP growth tends to be stronger the farther
a country is from the technological frontier, because in that case R&D is im-
portant not only to favour the introduction of innovation, but also to facili-
tate the adoption of already existing technologies (absorptive capacity of
R&D): I have therefore interacted the R&D stock with the distance from the
frontier, but the interaction term was always very small and largely in-
significant, perhaps denoting that in this empirical application the effects of
R&D might be mainly on the rates of innovation rather than on facilitating
technology transfer.
In column 8 human capital stock (HCit – 1) has been included in the re-
gression equation. As human capital might be endogenous, I have instru-
mented it with HCit – 2 and HCit – 3. Parameter estimates show that human cap-
ital exerts a positive effect on TFP growth, but the coefficient is statistically
insignificant: this result is however not uncommon in the empirical litera-
ture on the impact of human capital on productivity growth, both in the case
of cross country studies (Vandenbussche et al., 2006) and in the case of Italy
(Hirsh - Sulis (2008) and Lodde (2007b)) However, it should be noted that
the labour input used to build TFP already incorporates the impact of hu-

20 The Sargan test statistics does not reject the overidentifying restrictions and there

is no evidence of serial correlation. In the first stage regression of R&D, the F test of ex-
cluded instruments is highly significant and, in particular, R & Dit – 2 and R & Dit – 3 are both
statistically significant at 5%. In the first stage regression of GAP, the F test of excluded in-
struments is about 200 and GAPit – 2 and GAPit – 3 are both statistically significant at 1% and
10%, respectively.
21 Regression results are robust to dropping the TFP growth in the frontier country.

Furthermore, R&D capital remains significant and with a similar order of magnitude if I
make the stronger assumption that R&D is simply predetermined in the TFP growth equa-
tion rather than endogenous (which amounts to assume that E(ReDit – svijt) = 0 and that
E(ReDit + svijt) ≠ 0, s ≥ 0). Finally, given that the TFP level indexes suggest that convergence
occurred only after 1995, I have allowed for the coefficient of GAP to change after 1995:
while econometric estimates do suggest a statistically significant acceleration in catching-
up after 1995 (i.e. a “more negative” coefficient associated to GAP), the relative difference
between the two sub-periods is however not large.
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 293

man capital: as a result, only as long as the latter generates important ex-
ternalities we should expect it to exert a large and significant impact on TFP
growth. For example, using a sample of OECD industries, Inklaar et al.
(2008) find that they are able to detect a positive and significant impact of
human capital on TFP growth only when the latter is built without includ-
ing a correction for human capital. Therefore, I decided to run a similar ex-
ercise by estimating an equation identical to that reported in column eight,
but without correcting all TFP variables for human capital and, although the
coefficient of human capital, as expected, went up, it still remained in-
significant.
Vandenbussche et al. (2006) have recently argued that the mixed em-
pirical evidence on the impact of human capital on TFP, especially in the
case of high-income countries, may stem from the fact that it is not the ab-
solute number of years of schooling per se that matters in driving TFP
growth, but rather the composition of human capital, i.e. the relative im-
portance of higher education. Vandenbussche et al. (2006) also argue that
the fraction of higher education should matter more in fostering TFP growth
the closer a region is to the technology frontier: high TFP regions can in fact
achieve strong growth rates of TFP mainly through the introduction of in-
novations rather than through imitation, and in turn it is higher, rather than
basic, education that should be more closely related to the introduction of
innovations. Following the lead of Vandenbussche et al. (2006), I have there-
fore run a regression similar to that in column 8, using as a proxy for hu-
man capital the fraction of the adult population with at least an university
degree, and augmenting it with the interaction between the distance from
the frontier and human capital. However, the coefficients of the two human
capital variables turned out to be slightly negative, very small and largely in-
significant. There is however some evidence, consistent with that reported
in Vandenbussche et al. (2006), that the effect of the fraction of population
with at lest university level education on TFP growth increased over time: in
particular, it became positive after 1995 although not significant at conven-
tional levels of confidence. It may be interesting to note that if I drop the
sector-region fixed effects and the region specific time trends, both human
capital and its interaction with the distance from the frontier display posi-
tive and significant coefficients, which would imply that human capital may
be more effective for regions near the technological frontier: however this
result could be driven by omitted variables at the regional level (see Mc-
Marrow et al., 2009).
Human capital has been included in all regression equations in levels,
the theoretical rationale of this specification being that it is the stock (or the
composition) of human capital that drives the innovation process (Nelson -
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294 MAURIZIO CONTI

Phelps, 1966); however, it may also be reasonable to assume that it is the ac-
cumulation of human capital the “true” engine of TFP growth. Therefore, as
a final robustness check, I have estimated a regression equation where I have
included (as in Cameron, 2005) both the fraction of population with at least
an university degree (UNIVFit-1) and its year on year increase (∆UNIVFit-1).
The results displayed in column 9 suggest that both the fraction of popula-
tion with university education and its yearly increase are positive, but only
the latter is significant exactly at 10%, suggesting perhaps that human cap-
ital might have had a level, rather than a growth, effect on TFP in this sam-
ple.22
To sum up, the econometric models estimated in this section highlight
two main issues. First, there is robust evidence that R&D capital may have
had a positive effect in stimulating the rate of innovation over the sample
period, while in the case of human capital there is some weak evidence in
favour of a positive impact on TFP growth of the growth in the fraction of
population with an university degree; in second place, spillovers from the
frontier region and, especially, the imitation and adoption of frontier tech-
nologies by regions far away from the frontier appear to have been impor-
tant TFP growth drivers over the sample period.

5. CONCLUSION
In this work growth accounting techniques have been used to analyse
the evolution of labour and total factor productivity for the Italian regions
at the sector level over the period 1980-2004. The major finding of the pa-
per is that the Italian productivity decline has been widespread across all sec-
tors in most regions. However, there is also some evidence that the decline
has been less marked in the southern regions.
Another finding of the paper is that the decline in LP growth has to be
attributed mainly to a fall in the TFP growth rate, especially in the centre-
north, while the contribution of capital accumulation played a less key role.
As a consequence, the divergent pattern of LP growth between northern and
southern regions mainly stems from the different dynamics of TFP growth.
While different explanations may be invoked to justify this relative pattern

22The growth effect is even stronger if I do not correct TFP for human capital. Hirsh
- Sulis (2008) find both a level and a growth effect of human capital on LP growth in Ital-
ian regions (see also Lodde, 2007b). See De la Fuente and Ciccone (2003) for a discussion
on the estimation problems facing researchers trying to empirically disentangle the level and
growth effects of human capital.
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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 295

(regional differences in the pattern of structural change, or short to medi-


um-run effects linked to differences in adjustment costs, labour market
changes, different exposures to globalization, etc.), the econometric esti-
mates reported in the paper suggest that an important role may have been
played by catching-up processes in relative TFP.
In fact, consistently with the Neo-Schumpeterian growth theory, TFP
growth has been consistently found to depend positively on R&D and to be
stronger in those regions that were far away from the technological frontier;
in turn, the impact of human capital has not been found to be very robust,
even if there is some weak evidence supporting the possibility that stronger
growth in the fraction of population with university education might be as-
sociated to higher TFP growth.
Because the multilateral indices of TFP built in this paper show for each
sector that relative TFP in the north has consistently outperformed that in
the south, one can reasonably argue that in southern regions the imitation
and adoption of frontier technologies may have had a key role in fostering
the south’s relative productivity performance.
It is also important to observe that this finding of convergence in rela-
tive TFP levels is not the spurious result of differences across regions in the
industry mix or of changes over time in the pattern of structural change at
the regional level: in fact the convergence process survives even after con-
trolling for unobserved region-sector fixed effects, regional specific time
trends, sector-year fixed effects as well as measurement error in relative TFP.
In turn, the fact that important north-south differentials in relative TFP still
exist at the end of the sample period suggests that, for southern regions, the
imitation and adoption of existing technologies might keep on playing an im-
portant role over the next years as a TFP growth channel. However, this does
not necessarily mean that southern regions will keep on out-performing
northern ones in terms of observed TFP growth, as the occurrence of (ab-
solute) convergence depends also on steady state determinants of relative
TFP, and therefore on the relative rates of innovation in frontier versus non-
frontier regions, which might well be changing over the next years for the
effects of differences in, say, the rate of investment (and its effectiveness) in
R&D and human capital in the various regions.

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THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 299

APPENDIX 1
The data used in this paper are mainly taken from the Regional Eco-
nomic Accounts (REA) released by ISTAT, currently available for the 1980-
2004 period. From the REA I have got information on value added (at basic
prices), gross fixed investment, total employment expressed in Standard
Units of Labour,23 total compensation of employees for each region and,
within each region, for six sectors, namely Agriculture, forestry and fishery
(AFF); Industry in strict sense (IND), Construction (CON); Trade, hotels &
restaurants, repairs, transport & communications (TRD); Financial inter-
mediation, professional and business services (FIN) and, finally, Other serv-
ices (OTH), which groups public administration, education, health and so-
cial services.
ISTAT does not publish capital stocks at the regional level. To build my
own estimates of the capital stocks, I followed a procedure first proposed for
the Italian case by Paci - Pusceddu (2000). This procedure consists in deriv-
ing an estimate of the regional distribution of the Italian physical capital
stock24 for each of the six sectors in 1980. This estimate was derived apply-
ing data made available by Paci - Pusceddu (2000): in particular I comput-
ed, for each sector, the average regional share of investments and total em-
ployment over the period 1970-1980.25 I then built a weighted average26 of
the regional series of investment and employment shares to derive the esti-
mate for the 1980 distribution of the Italian capital stock at regional level
which in turn allowed me to derive the benchmark capital stock for each re-
gion/sector in 1980. A (nation-wide) depreciation rate was derived, for each
sector, as the average 1980-2004 ratio between depreciation and net capital
stock using ISTAT national data. I then applied a standard perpetual inven-
tory method to build the capital stock series for each year up to 2004. The

23 In productivity analysis the number of hours worked would be a preferable meas-


ure of labour input. Unfortunately hours worked are not available at regional level. This
means that, in the early part of our sample, when the hours per working age person de-
clined, our measure of labour productivity growth would tend to understate “true” labour
productivity growth; the other way round in the second part of the sample, when average
hours per working age person increased.
24 For the Italian capital stock data in 1980 I used the net capital stock data contained

in the EU KLEMS database of the Groningen Growth and Development Centre.


25 For example, in the case of investment, I computed, for each sector, the share of each

I
region as: si = i , where I i is the average investment in region i in the 1970-80 period.
20
∑ Ii
i =1
26 The weights were 75% to investment and 25% to employment.
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300 MAURIZIO CONTI

regional capital stocks have then been computed as the sum of the regional
sectoral capital stocks.
The labour share to be used in the growth and level accounting exercise
was derived as the ratio between total compensation of employees in nomi-
nal prices (multiplied by the ratio between total employment and total em-
ployees in order to take into account the employment income of self-em-
ployed) and value added in nominal prices. Because the labour share of val-
ue added exhibits a quite large year-on-year volatility, which is likely to be
related to measurement error problems, I decided to smooth it using the pro-
cedure suggested by Harrigan (1999) who showed that, with a technological
structure of the Translog type and under standard market clearing condi-
tions, the labour share in region i, sector j and time t can be expressed as a
function of the capital labour-ratio:
K
α ijt = aij + δ ij ln( ) (A1.1)
L ijt
As long as the actual labour shares deviate from their true value by i.i.d.
measurement error only, the parameters of equation (A1.1) can be estimat-
ed with a fixed effects methodology and the predicted values for the labour
shares used instead of the actual values. After this smoothing procedure, the
regional average smoothed labour share is about 0.69, declining from 0.75
in 1980 to about 0.65 in 2004, but with some differences across sectors. For
the AFF sector, notwithstanding this smoothing procedure, the labour share
turned out to be bigger than one for many (mainly southern) regions: for this
reason I decided to apply a time invariant value of 0.75 for each region in
the sample in the case of the AFF sector.
As already discussed in Section 2.2. I corrected raw labour by a meas-
ure of human capital, namely the average years of schooling in the region.
In particular, I followed Bils -Klenow (2000) and I proxied human capital in
region i, at time t as :

Hit = eθ i Eit (A1.2)

where θi is the time invariant region specific return to schooling reported in


Ciccone (2004) and derived from the estimation of standard Mincerian wage
regressions based on data taken from the 1987 through 2000 waves of the
Survey of Households, Incomes and Wealth of the Bank of Italy and Eit is
given by the average years of schooling in region i as of time t. The main lim-
itation of the specification adopted in equation (A1.2) is the implicit as-
sumption that returns to education are constant, irrespectively to the num-
ber of schooling years: more generally, one might in fact think that the re
GDE-03_VOLAUK@0269-0310#.qxd 3-11-2009 13:28 Pagina 301

THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 301

turn of an extra year of schooling changes with the number of schooling


years. While the assumption of an invariant return to education parameter
is likely to create problems when using international samples and long time
periods (which are characterized by large variability in schooling levels), I
believe that this assumption is justifiable in this study, which is based on re-
gions within the same country observed over a relatively short time span.
The average years of schooling were taken from Ciccone (2004) and are
based on a combination of census data over the period 1961-2001 (on a five
year basis) as well as on the labour force surveys for the 1991-2001 period.
Missing data were interpolated with the ipolate function in STATA. Average
years of schooling range from 7.2, 6.9, 7.1, and 6.3 in the north-west, north-
east, centre and south, respectively in 1980 to 10.6, 10.7 and 9.9 in the north,
centre and south, respectively in 2004.
In order to take into account the possibility that capacity utilization is-
sues might affect productivity estimates I have followed the procedure sug-
gested by Griffith et al. (2004) which consists in regressing, for each region-
sector combination, value added on a constant and a time trend, and using
the predicted values Ŷ to modify the capital stock series as follows:
 Yijt − Yˆijt 
K *ijt = K ijt *  1 +  (A1.3)
 Yˆijt 

In periods of booms (when output is higher than its trend value) the
term in brackets in equation (A1.3) is positive, and therefore the capacity uti-
lization-corrected K* tends to be higher than raw capital, and vice-versa dur-
ing recessions: the resulting capital stock series appears to be somewhat
smoother than the raw series, although none of the main papers’ results
would appear to hinge on the exact smoothness procedure underlying equa-
tion (A1.3).
For some sensitivity analysis of the main productivity estimates I need
the mark-up µ of prices over marginal costs. To compute µ I have followed
the methodology first introduced by Rogers (1995) and later implemented
by Scarpetta et al. (1996), Aghion et al. (2007) and Hoj et al. (2007) among
the others. Rogers (1995) showed that, assuming constant returns to scale,
the nominal Solow residual and the Lerner index of market power are re-
lated by the following relationship:

∆ ln( PY ) − α∆ ln(WHL ) − (1 − α )∆ ln( RK ) = B[ ∆ ln( PY ) − ∆ ln( KR)] (A1.4)

where PY is nominal value added, W is the average labour wage, HL is hu-


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302 MAURIZIO CONTI

man capital-adjusted labour input, R is the cost of capital27, K the capital


p − c µ −1
stock, B = = is the Lerner index, and c is the average production
p µ
cost. By appending an error term to equation (A1.4), the Lerner index B can
be consistently estimated using OLS and then used to recover the mark-up
µ. In this work, I estimated separately for each sector and for the economy
as a whole equation (A1.4) using a fixed effects estimator allowing for region
specific values of B.28
The average mark-ups for the period 1980-2004 for each region are pre-
sented in Table A2.2 in Appendix 2 for the economy as a whole, while for the
single sectors are available from the author upon request. As one can see
from Table A2.2, the average mark-up is about 37%, with a standard devia-
tion of about 6%: similar values for Italy have been reported by Hoj et al.
(2007) -who found an average mark-up of about 15% for manufacturing and
about 35% for non-manufacturing- and Griffith et al. (2007) -who comput-
ed an estimate of about 1.49 over the period 1986-2000.
In order to compute the regional stock of R&D capital29 I have applied
a standard perpetual inventory method to R&D expenditure data for the
business sector which I have been able to collect starting from 1984. In par-
ticular, R&D expenditure has been deflated using as deflator the average of
the implicit value added deflator at regional level and of a wage index; con-
sistently with the literature (see Bronzini and Piselli, 2009 for Italy), the be-
ginning of period R&D stock has been computed as RS0 = R & D0 / ( g + δ ) ,
where g is the average growth rate of R&D expenditure over the sample pe-
riod, δ is the depreciation rate (set equal to 15%) and R & D0 has been set
to be equal to R&D expenditure in the first year of the panel.

27 The cost of capital has been estimated as R = [(i – πe) + δ) ρ , where i – πe, the real in-
k
terest rate, has been proxied by the difference between the ten-years nominal interest rate
on government bonds and the Hodrick-Prescott filter applied to the GDP deflator, δ is a
common nation-wide depreciation rate of 5.5% and, finally, ρk is an investment price de-
flator.
28Equation (A1.4) is likely to be a downwards biased estimate of the “true” mark-up

in the case of increasing returns to scale, when a large fraction of the capital stock is
sunk and for industries characterized by relatively strong rigidities over the business cy-
cle (Oliveira et al., 1996).
29 Unfortunately ISTAT does not publish regional R&D expenditure disaggregated at

the sector level.


GDE-03_VOLAUK@0269-0310#.qxd
APPENDIX 2
TABLE A.2.1 – Labour productivity growth decomposition:
industry level results
Human capital

THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA


LP growth Capital Deepening TFP growth accumulation
80-04 80-95 95-04 80-04 80-95 95-04 80-04 80-95 95-04 80-04 80-95 95-04
AFF North-West 4.1% 4.9% 2.8% 1.1% 1.1% 1.1% 2.3% 3.1% 1.0% 0.7% 0.7% 0.8%
North-East 3.5% 3.1% 4.1% 1.2% 1.1% 1.5% 1.5% 1.3% 1.8% 0.8% 0.8% 0.9%

3-11-2009
Centre 4.5% 5.8% 2.4% 1.4% 1.7% 0.8% 2.5% 3.3% 1.0% 0.7% 0.8% 0.7%
South 3.3% 3.3% 3.3% 1.0% 1.2% 0.8% 1.7% 1.5% 2.0% 0.7% 0.8% 0.7%
IND North-West 2.2% 3.3% 0.4% 0.8% 1.0% 0.4% 0.8% 1.7% -0.7% 0.7% 0.6% 0.7%

13:28
North-East 1.7% 2.7% 0.2% 0.6% 0.7% 0.5% 0.4% 1.3% -1.1% 0.7% 0.7% 0.8%
Centre 2.1% 2.6% 1.2% 0.8% 1.0% 0.5% 0.6% 0.9% 0.1% 0.7% 0.7% 0.6%
South 1.5% 1.9% 0.7% 0.4% 0.6% 0.1% 0.5% 0.7% 0.0% 0.6% 0.7% 0.6%

Pagina 303
CONS North-West 0.1% 0.4% -0.3% 0.3% 0.1% 0.8% -1.0% -0.4% -1.8% 0.8% 0.8% 0.8%
North-East 1.0% 0.9% 1.2% 1.0% 0.5% 1.9% -0.7% -0.3% -1.5% 0.8% 0.7% 0.8%
Centre 0.0% 0.2% -0.4% 0.5% 0.4% 0.7% -1.2% -0.8% -1.8% 0.7% 0.7% 0.6%
South 0.3% 1.3% -1.2% 1.1% 1.7% 0.2% -1.3% -1.0% -1.9% 0.6% 0.6% 0.5%
TRD North-West 1.3% 1.7% 0.6% 0.9% 1.0% 0.7% -0.3% 0.1% -0.8% 0.7% 0.7% 0.7%
North-East 1.0% 1.2% 0.6% 0.9% 0.7% 1.2% -0.7% -0.3% -1.3% 0.7% 0.7% 0.7%
Centre 1.1% 1.4% 0.6% 1.3% 0.8% 2.2% -0.7% 0.1% -1.9% 0.5% 0.5% 0.4%
South 1.4% 1.4% 1.4% 0.7% 0.8% 0.5% 0.0% -0.2% 0.3% 0.7% 0.8% 0.6%
FIN North-West -1.5% -1.6% -1.4% -1.7% -1.9% -1.4% -0.3% -0.2% -0.4% 0.4% 0.4% 0.4%
North-East -1.4% -1.5% -1.4% -1.5% -1.6% -1.3% -0.3% -0.2% -0.6% 0.4% 0.4% 0.5%
Centre -1.6% -1.3% -2.1% -0.6% -0.7% -0.4% -1.8% -1.5% -2.4% 0.8% 0.8% 0.8%
South -1.6% -1.5% -1.7% -2.2% -2.0% -2.6% 0.3% 0.1% 0.6% 0.4% 0.4% 0.3%

303
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304 MAURIZIO CONTI

TABLE A2.2 – Mark-up estimates: total economy


Liguria 1.37
Piemonte 1.39
Lombardia 1.49
Val d’Aosta 1.39
Veneto 1.43
Trentino Alto Adige 1.33
Friuli Venezia Giulia 1.33
Emilia Romagna 1.45
Toscana 1.43
Umbria 1.41
Marche 1.30
Lazio 1.43
Abruzzo 1.37
Molise 1.27
Campania 1.25
Puglia 1.39
Basilicata 1.28
Calabria 1.35
Sicilia 1.41
Sardegna 1.35
GDE-03_VOLAUK@0269-0310#.qxd
TABLE A.2.3 – Multilateral Indices of TFP
Total Factor Productivity Levels
Whole Region AGR IND

THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA


1980 1985 1990 1995 2000 2004 1980 1985 1990 1995 2000 2004 1980 1985 1990 1995 2000 2004
Lig 104.0 107.1 107.9 107.7 109.3 109.1 105.3 128.4 169.7 168.4 156.8 142.3 98.3 103.4 110.9 108.6 111.2 110.9
Pie 108.7 113.3 112.2 109.0 106.7 104.9 115.7 110.9 121.9 113.8 103.4 98.4 103.6 112.7 110.7 113.5 110.3 107.1

3-11-2009
Lom 110.0 113.0 115.3 117.4 115.9 113.7 132.2 127.0 123.5 129.6 130.4 125.8 102.5 107.7 113.0 120.1 116.9 114.1
Va 105.1 106.6 99.7 94.8 88.5 89.3 47.0 46.6 41.6 42.6 48.7 54.5 106.2 92.2 84.9 86.0 79.3 84.7
Ven 108.3 112.2 111.4 113.6 111.9 109.9 141.0 116.7 129.4 122.6 121.4 125.3 101.5 105.0 106.2 111.8 112.0 108.4
Taa 113.5 106.9 102.3 99.9 95.6 92.5 95.1 95.3 105.6 93.2 89.1 86.6 115.5 114.8 105.0 110.2 99.9 93.5
Fvg 90.3 91.0 98.4 103.8 103.8 105.2 112.5 116.1 127.1 120.2 123.7 103.9 87.9 92.9 95.6 105.0 101.4 100.2

13:28
Emr 112.3 108.2 108.8 110.9 109.2 107.7 158.1 131.0 132.7 112.7 114.5 117.5 112.3 108.0 107.4 112.7 109.6 105.9
Tos 109.9 109.8 111.7 112.5 111.5 110.6 111.1 99.4 122.3 129.9 104.8 104.6 107.4 106.4 105.8 107.7 109.4 110.0
Umb 104.8 103.5 105.4 107.1 105.0 104.5 88.4 101.9 116.7 124.2 135.8 143.1 124.1 120.1 122.5 112.7 102.3 101.9

Pagina 305
Mar 93.4 93.4 95.7 101.1 103.0 101.5 96.9 99.3 123.2 115.8 111.9 107.3 93.1 89.2 88.8 97.0 97.7 96.7
Laz 120.8 117.8 119.5 116.9 114.5 113.0 122.3 117.0 110.9 109.0 102.0 102.2 112.4 110.1 116.4 116.3 122.4 129.5
Abr 95.8 96.7 96.0 94.2 96.0 96.2 91.0 95.3 99.5 100.2 104.0 102.9 109.0 113.9 106.7 100.3 99.7 99.0
Mol 86.8 87.4 89.0 90.4 92.5 94.5 54.5 75.8 85.4 77.4 92.2 92.0 125.0 102.0 88.1 88.6 92.1 94.2
Cam 93.2 94.3 93.6 89.4 92.8 94.8 91.1 97.5 108.8 81.7 89.4 87.4 92.8 87.5 91.2 89.3 92.0 94.8
Pug 91.1 91.1 94.2 94.1 97.3 97.6 133.5 122.5 97.1 103.9 95.6 93.7 77.2 79.0 83.9 88.7 90.6 90.4
Bas 79.9 80.2 82.2 87.3 89.4 91.7 62.2 59.6 59.1 80.0 92.3 91.3 69.2 77.7 87.8 94.3 93.6 101.2
Cal 83.2 81.5 80.8 79.9 84.7 85.4 88.3 100.2 61.7 74.7 74.5 84.8 74.2 76.6 75.2 70.1 75.8 78.4
Sic 103.6 100.7 99.0 92.5 94.0 96.5 129.9 129.1 100.2 94.8 89.6 96.9 111.3 109.6 109.9 102.0 96.5 93.5
Sar 99.8 97.4 88.7 89.2 88.5 89.0 110.0 96.1 69.0 77.9 77.3 82.4 89.8 99.8 98.9 94.1 94.0 91.6
Max 120.8 117.8 119.5 117.4 115.9 113.7 158.1 131.0 169.7 168.4 156.8 143.1 125.0 120.1 122.5 120.1 122.4 129.5
Min 79.9 80.2 80.8 79.9 84.7 85.4 47.0 46.6 41.6 47.1 48.7 54.5 69.2 76.6 75.2 70.1 75.8 78.4
Sd 10.8 10.7 10.7 10.6 9.5 8.5 28.0 22.0 29.4 26.1 23.4 20.5 15.1 12.7 12.4 12.4 11.7 11.1
Gmn 105.6 106.0 106.4 106.6 105.2 104.2 105.1 103.7 112.7 109.7 107.8 106.0 105.3 105.5 105.2 107.5 105.0 104.5

305
Gms 90.7 90.1 89.4 88.9 91.2 92.7 91.1 94.5 80.9 83.8 86.9 89.7 89.5 89.5 90.2 89.1 90.4 91.8
Gmn and Gms are the geometric averages for the centre-north and southern regions, respectively.
GDE-03_VOLAUK@0269-0310#.qxd
TABLE A.2.4 – Multilateral Indices of TFP

306
Total Factor Productivity Levels
CON TRD FIN
1980 1985 1990 1995 2000 2004 1980 1985 1990 1995 2000 2004 1980 1985 1990 1995 2000 2004
Lig 84.5 76.9 68.1 80.3 94.2 97.4 85.6 91.0 95.3 100.4 103.0 103.8 123.6 124.2 119.4 117.2 119.8 115.4
Pie 106.9 118.7 119.4 110.5 108.3 111.6 107.0 104.4 96.0 91.6 93.7 94.7 107.0 104.4 96.0 91.6 93.7 94.7
Lom 95.4 99.0 101.7 95.7 99.9 94.4 109.2 115.6 112.6 112.1 108.8 106.1 108.9 114.6 115.0 112.7 115.5 113.2

3-11-2009
Va 127.2 120.4 93.5 109.0 72.3 61.0 101.6 107.8 103.9 93.8 92.1 94.8 86.4 91.4 94.7 97.2 102.6 108.0
Ven 103.2 125.1 121.4 126.9 119.2 114.5 112.8 117.3 110.1 111.5 108.9 108.4 117.9 115.9 110.3 105.4 104.3 98.6
Taa 131.2 124.4 113.3 130.4 141.9 159.8 111.9 109.5 103.3 98.7 92.9 91.8 121.5 111.7 100.4 95.6 91.0 84.7
Fvg 132.9 104.3 119.7 123.1 110.6 142.0 99.5 102.5 103.6 111.5 111.0 105.9 79.9 83.4 90.1 93.2 100.4 102.7

13:28
Emr 112.7 103.8 118.1 105.1 114.9 125.9 118.6 115.3 111.9 111.2 106.6 104.3 111.7 109.4 109.8 109.7 111.0 107.3

MAURIZIO CONTI
Tos 95.2 94.7 89.2 90.1 101.9 97.9 106.9 106.3 102.7 101.7 97.7 97.3 119.7 121.9 129.3 127.0 124.8 121.3
Umb 105.7 103.9 85.4 96.3 101.7 104.7 94.5 100.1 106.0 116.3 111.8 108.1 86.7 86.2 95.2 96.0 97.0 97.3
Mar 108.2 93.9 103.2 108.3 109.5 111.8 98.1 100.8 98.2 101.7 102.0 99.4 90.0 99.7 100.8 102.3 105.2 102.8

Pagina 306
Laz 85.8 94.6 106.7 86.5 87.4 81.5 108.9 113.2 118.8 120.3 113.1 109.9 116.7 126.5 134.3 132.8 129.3 121.3
Abr 90.3 84.8 80.8 65.3 72.5 81.1 108.2 95.8 89.9 93.1 92.8 93.8 106.9 98.8 97.3 97.7 100.8 97.7
Mol 89.2 81.9 83.5 102.7 89.1 89.8 107.3 103.8 108.1 102.3 102.5 106.3 92.7 89.2 91.4 96.8 96.5 96.3
Cam 87.7 116.8 105.6 90.0 96.4 98.6 86.5 81.1 82.0 84.0 89.3 93.0 89.7 89.5 86.8 86.1 91.5 89.8
Pug 103.6 83.8 89.7 76.8 86.2 83.7 99.9 102.5 102.2 101.3 104.2 103.2 87.5 90.6 90.4 91.9 97.5 97.1
Bas 108.5 107.6 100.2 114.8 97.9 92.0 76.5 73.9 75.9 87.7 95.3 98.9 83.9 82.0 85.3 88.7 88.3 90.5
Cal 61.2 73.4 83.0 83.1 94.1 88.7 95.7 82.0 77.9 79.6 86.7 90.1 68.0 71.5 74.8 78.9 82.5 83.1
Sic 96.4 89.4 115.5 104.2 105.1 110.0 92.0 92.0 92.1 89.6 96.3 95.4 97.0 91.8 84.9 84.4 86.4 87.3
Sar 116.5 131.3 120.3 130.4 122.2 118.3 87.3 99.8 96.8 100.4 96.9 97.5 101.3 96.9 89.0 89.0 89.6 88.0
Max 132.9 131.3 121.4 130.4 141.9 159.8 118.6 117.3 118.8 120.3 113.1 109.9 123.6 126.5 134.3 132.8 129.3 121.3
Min 61.2 73.4 68.1 65.3 72.3 61.0 76.5 73.9 75.9 79.6 86.7 90.1 68.0 71.5 74.8 78.9 82.5 83.1
Sd 17.0 16.7 15.6 17.9 16.1 21.9 10.6 11.6 11.2 10.8 7.8 6.1 15.5 15.1 15.1 13.7 12.7 11.3
Gmn 105.0 102.4 100.2 100.4 101.0 103.4 104.5 105.8 103.8 104.5 102.4 101.2 104.9 105.9 106.3 105.3 106.7 104.5
Gms 93.1 95.8 98.7 98.8 98.1 96.6 91.7 90.1 90.0 91.7 95.7 97.6 88.0 87.0 85.9 87.8 90.2 90.2

Gmn and Gms are the geometric averages for the centre-north and southern regions, respectively.
GDE-03_VOLAUK@0269-0310#.qxd 11-11-2009 15:06 Pagina 307

THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 307

FIGURE A2.1 - Total Factor Productivity AFF. Kernel density estimates

.025

.02

.015

.01

.005

0
0 50 100 150 200
expTFP_3

tfp-1980 tfp-2004

FIGURE A2.2 - Total Factor Productivity CON. Kernel density estimates


.025
.02
.015
.01
.005
0

60 80 100 120 140 160


expTFP_3

tfp-1980 tfp-2004
GDE-03_VOLAUK@0269-0310#.qxd 3-11-2009 13:28 Pagina 308

308 MAURIZIO CONTI

FIGURE A2.3 - Total Factor Productivity FIN. Kernel density estimates

.03
.02
.01
0

60 80 100 120 140


expTFP_3

tfp-1980 tfp-2004

FIGURE A2.4 - Total Factor Productivity IND. Kernel density estimates


.04
.03
.02
.01
0

60 80 100 120 140


expTFP_3

tfp-1980 tfp-2004
GDE-03_VOLAUK@0269-0310#.qxd 3-11-2009 13:28 Pagina 309

THE ITALIAN PRODUCTIVITY DECLINE: EVIDENCE FROM REGIONAL DATA 309

FIGURE A2.5 - Total Factor Productivity TRD. Kernel density estimates

.05
.04
.03
.02
.01
0

60 80 100 120 140


expTFP_3

tfp-1980 tfp-2004

FIGURE A2.6 - Total Factor Productivity AGGREGATE. Kernel density estimates


.04
.03
.02
.01
0

80 90 100 110 120


expTFP_3

tfp-1980 tfp-2004
GDE-03_VOLAUK@0269-0310#.qxd 3-11-2009 13:28 Pagina 310