Francesco Daveri

Unemployment, growth and taxation in industrial countries

To the layperson, the upward trend in European unemployment is related to the slowdown in economic growth. We argue that the layperson’s view is correct. The increase in European unemployment and the slowdown in economic growth are related because they stem from a common cause: an excessively high cost of labour. In Europe, labour costs have gone up for many reasons, but one is particularly easy to identify: higher taxes on labour. If wages are set by strong and centralized trade unions, an increase in labour taxes is shifted onto higher real wages. This has two effects. First, it reduces labour demand, and thus creates unemployment. Second, as firms substitute capital for labour, the marginal product of capital falls; over long periods of time, this in turn diminishes the incentive to accumulate and thus to grow. Thus high unemployment is associated with low growth rates. The model also predicts that the effect of labour taxation differs sharply in countries with different labour market institutions. We test these predictions on data for 14 industrial countries between 1965 and 1991, and find striking support for them. In particular, labour taxes have a strong positive effect on unemployment only in Europe and not in other industrial countries. The observed rise of about 9 percentage points in labour tax rates can account for a reduction of the EU growth rate of about 0.4 percentage points a year, about one-third of the observed reduction in growth between 1965–75 and 1976–91, and a rise in unemployment of about 4 percentage points.

Italy's Decline: Getting the Facts Right

The Italian economy is often said to be on a declining path. In this paper, we document that: (i) Italy’s current decline is a labor productivity problem (ii) the labor productivity slowdown stems from declining productivity growth in all industries but utilities (with manufacturing contributing for about one half of the reduction) and diminished interindustry reallocation of workers from agriculture to market services; (iii) the labor productivity slowdown has been mostly driven by declining TFP, with roughly unchanged capital deepening. The only mild decline of capital deepening is due to the rise in the value added share of capital that counteracted declining capital accumulation.

Experience, Innovation, and Productivity Empirical Evidence from Italy’s Slowdown

The authors investigate whether the level of employee experience is good or bad for innovation and productivity. Using a sample of Italian manufacturing firms during the early 2000s, the authors find different results for managers’ versus workers’ experience. The effect of managerial experience—proxied by age—on firm performance appears to depend on the type of firm; in innovative firms, having older managers and board members has a negative effect on innovation and productivity, while in non-innovative firms, the costs and benefits of having older managers appear to cancel each other out. For workers, the effect of having a high share of inexperienced (temporary) workers is unambiguously associated with low innovation and low productivity. These results also hold when endogenous regime switching is taken into consideration.

Where Do Migrants Go

In this paper, we study migration decisions taken by risk-averse households. Aggregate data from the regions of Southern Italy are used to test whether risk is a significant determinant of the decision to migrate abroad or inside the country. This indeed appears to be the case for both foreign and domestic migrations, after controlling for unemployment and wage differentials and other plausible control variables. We interpret our results as evidence that, whereas financial markets are absent or malfunctioning, migration provides a shelter against uncertain income prospects. Copyright 1999 by Royal Economic Society.

Information Technology and Productivity Growth Across Countries and Sectors

The extraordinary success of the U.S. economy and the parallel growth slowdown of the large European countries and Japan in the 1990s bear a simple rationale. The United States has eventually benefited from the effective adoption of information technologies. The introduction of the newly installed IT capital has not instead enhanced aggregate capital accumulation and TFP growth in Europe and Japan. At least on impact, IT capital has mainly displaced existing capital and methods of production rather than supplementing them. The limited growth-enhancing effects from information technologies in countries other than the United States have occurred in the IT-producing sectors, while the IT-using industries have contributed the bulk of productivity gains in the United States.

A Numerical Approach to Fiscal Policy, Unemployment and Growth in Europe

We calibrate an infinite-horizon model with endogenous growth and unemployment on actual data from the largest countries in the European Union. Two types of balanced-budget fiscal policy experiments are studied. First, the effects of separately changing the tax rates on capital, labor and subsidies, as well as the replacement rates, are analyzed, assuming offsetting changes in lump-sum transfers. Second, we rule out offsetting transfers and study how effective is the cut in labor taxes when financed either raising capital taxation or reducing unemployment subsidies. We find two main results: (i) with lump-sum transfers, reducing labor taxes and unemployment subsidies is beneficial to both employment and growth, while cutting capital taxes is less beneficial; (ii) without transfers, cutting labor taxes is more effective when financed by a (modest) cut in unemployment subsidies rather than by a (sizable) increase in capital taxes. Sensitivity analysis shows that our results are robust to changes in a vast range of parameter values.

Service Deregulation, Competition, and the Performance of French and Italian Firms

We use firm-level data for France and Italy to explore the impact of service regulation reform implemented in the two countries on the mark-up and eventually on the performance of firms between the second half of the 1990s and 2007. In line with some previous studies, we find that the relation between entry barriers and productivity is negative. This relation is intermediated through the firm’s mark up and is stronger in the long than in the short run.

Age, Technology and Labour Costs

Is the process of workforce aging a burden or a blessing for the firm? Our paper seeks to answer this question by providing evidence on the age-productivity and age-earnings profiles for a sample of plants in three manufacturing industries (“forest”, “industrial machinery” and “electronics”) in Finland. Our main result is that exposure to rapid technological and managerial changes does make a difference for plant productivity, less so for wages. In electronics, the Finnish industry undergoing a major technological and managerial shock in the 1990s, the response of productivity to age-related variables is first sizably positive and then becomes sizably negative as one looks at plants with higher average seniority and experience. This declining part of the curve is not there either for the forest industry or for industrial machinery. It is not there either for wages in electronics. These conclusions survive when a host of other plausible productivity determinants (notably, education and plant vintage) are included in the analysis. We conclude that workforce aging may be a burden for firms in high-tech industries and less so in other industries.

Costs of entry and exit from financial markets and capital flows to developing countries

Abstract Though the theory of irreversible investment under uncertainty is now well understood, no attempt has been made to empirically evaluate its predictions for foreign investment decisions. Yet costs of entry and exit from financial markets due to government restrictions certainly represent an important source of irreversibility. In this paper, a model with partial irreversibility of investment is used to derive a negative relation between costs of entry and exit from financial markets and foreign investment. Such a theoretical relation is consistent with empirical findings from a panel of 25 developing countries in 1987–1991.

THE IT REVOLUTION ACROSS THE UNITED STATES

In this paper we study the geography of the IT revolution in the U.S. economy. By relating the intensity of IT production and diffusion to labor productivity growth for the United States, we find three main results. First, states with above-average production intensity of IT manufacturing show more growth acceleration than other states. Second, the same applies to states with above-average IT diffusion. Yet, while the result for IT-producing states is strong, the result for IT-using states is somewhat smaller and less robust across specifications. Third, we also reconcile our state-wide pieces of evidence with previous industry and aggregate evidence. Accelerating productivity growth in IT-producing states stems from both IT-producing and IT-using industries in those states and is not a manifestation of the exclusive importance of IT production. Moreover, the less robust evidence for IT-using states is due to lower growth contributions from IT-producing and other industries in these states, not a symptom of a missing effect of IT usage.