Fact # 2: Labor cost in Italy is too high for Italian firms to be able to compete on world market. FALSE. And, by the way: high relative to what?

[If you have read Fact # 1, you have already read the premise. Thus, you should skip it and go to Fact #2 below directly]


On October 5, 2014  I decided I should embark on writing a series of short newspaper-like articles with the goal of attracting attention to explanations of the current situation of the Italian economy alternative to the ones offered by the (overwhelmingly neoclassical) austerity lovers. While I had not planned to publish both in Italian and in English, the ‘likes’ I got on the first three pieces in Italian convinced me that I should go the extra mile and publish them in English as well.

Of course, ‘likes’ on socials are not the only reason to publish in English. My preoccupation is that even many foreign colleagues of valor tend to adhere, along with the foreign general public, to judgments about the Italian economy that are not facts at all but, rather, judgements presented as facts. I thought it would be worthwhile to alert colleagues and public alike: when reading austerians, please take what you read cum grano salis, my friends!

And here is Fact #2:

Fact # 2: Labor cost in Italy is too high for Italian firms to be able to compete on world market. FALSE. And, by the way: high relative to what?

The everlasting discussions on the supposedly much needed reform of the Italian labor market is extraordinarily ideological and devoid of references to the reality of it. The ‘need for reform’ is reiterated over and over again by Italian governments, the IMF, the EC, OECD, and whoever belongs to the chorus. ‘Labor market reform’ has the center stage in the ‘structural reforms’ strategy, which one day somebody from the above prestigious agencies will take the pain to explain to us all -a much needed explanation indeed, since we suspect that they amount pretty much to what once-US President Ronald Reagan christened “voodoo economics”.

To discuss the point in an ideology-free fashion we have first of all cleared the ground of claims according to which Italian workers are overprotected by Italian labor law, overprotection that some parities claim is at the root of the lack of price competitiveness of Italian firms. Indeed, in Fact # 1 we showed that Italian labor is certainly protected by law; yet, it is less so than labor is in other high per-capita income countries, such as Germany and the Netherlands. On a more general level: there appears to be a falling degree of labor protection as country-level per capita income falls.

A second, obsessively reiterated proposition is that labor costs in Italy are too high. Figure 1 shows that such is not the case.

Figure 1: Hourly labour cost in industry, construction and services (except public administration, defense, compulsory social security) in 2013

2014 11 30 Fact 2 - Immagine

Source: Eurostat, October 2014

It is apparent from Figure 1 that average Italian labor cost is just below Ireland’s and just above the UK’s –and just above the EU-28’s average. While I want the reader to know that it gives me a great amount of pain to proceed to a certain type of comparisons, Figure 1 is telling: hourly labor cost steadily decreases from that prevailing in Norway to that prevailing in  Bulgaria, in a descending journey going through Germany’s, Italy’s, and Slovakia’s. I leave to the reader to draw the necessary and unambiguous conclusions, which again give me great pain to draw, about the correlation between per capita income, rate of unemployment, labor costs, quality of life, and so on.

Thus, we have a moral and a social obligation to demand an answer to the following question from the supporters of ‘wage moderation’: where do they want the country on this chart ten years from now?

They will tell us (not true, they will not answer the question) that the issue is not labor cost but the difference between labor cost and take-home wage; or alternatively, that we are in such a condition that labor must accept sacrifices to contribute to the enhancement of the international price competitiveness of the Italian system’ (sic!); or, that….

Let us state the problem in its correct terms: Italian labor cost is high? High relative to what? If one is to find the metrics of it, one has several options. Should we think in terms of the average hourly labor cost in the OECD member countries? To the average labor costs in countries whose labor costs are below the EU-28 average? To Pakistan’s? To New Zealand’s? Well, if one were to accept such line of reasoning, then the ‘best’ cost of labor would obviously be one below the lowest available one. In short, the starvation labor cost.

But I am absolutely sure that our austerians would not want a starving country. Yet, if that were so, why is it that they want to cut labor costs –and wages? Economic theory has a rather convincing answer to the question: they push for labor cost cuts as a way to compensate for the low levels of productivity of Italian firms, which hampers their international price competitiveness. In short: Since what makes a firm price-competitive on the world market is the cost of labor per unit of output, that is, cost of labor weighted by productivity, inability to make productivity grow is compensated through labor costs (and wage) cuts. Period.

Economic theory is very clear about all this. Labor cost is not the only determinant of international price competitiveness. It so much so that we one way to make international comparisons is through the concept of unitlabor costs, that is, the cost of labor divided by productivity –that is, the number  of units of output per unit of labor in the unit of time. Only he who is unable to increase productivity looks for competitiveness through labor costs cuts. Thereby slowly leading the country to starvation.

Yet, those who wanted to do so, and were able to do so, could enhance international price competitiveness by enhancing productivity, could they not? Why talking and talking about ‘structural reforms’ (I truly cannot take it anymore) instead of acting in favor of research and development, employee training, enhancement of project-management skills within firms? Why not invest in renovating the industrial base of the country in the direction of a new-found productive and trade specialization leading to a new age relative to that ‘made in Italy’ paradigm which, as we have been saying for years it would happen, has led us to compete on the world market with countries specializing in production and export of highly unskilled –labor content products?

Issues to be further discussed in the coming ‘Facts’.

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