Labor Costs and Corporate Investment in Italy

February 21, 2020

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Format: Chicago

Daniel Garcia-Macia. Labor Costs and Corporate Investment in Italy, (USA: International Monetary Fund, 2020) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The recovery of private investment in Italy has lagged its euro area peers over the past decade. This paper examines the role of elevated labor costs in hindering the recovery. Specifically, labor costs rose faster than labor productivity prior to the global financial crisis and have remained high since, weighing on firms’ profits, capital returns, and thus capacity to invest. Empirical analysis provides evidence for the impact of wages on investment at the sectoral and firm levels. Sectoral wage growth seems unrelated to sectoral productivity growth, but is negatively associated with investment. Firm-level data permit a better identification—by exploiting the interaction between sectoral wage growth (exogenous to the firm) and the lagged labor share of the firm. A 1 percent increase in real wages is estimated to cause a 1/3 percent fall in fixed capital. Profits absorb only ½ of the cost increase, pointing to the role of liquidity constraints. These results highlight the need for labor market reform to reinvigorate investment, and thus labor productivity and job creation.

Subject: Labor, Labor costs, Labor share, Minimum wages, Wage adjustments, Wages

Keywords: Capital returns, Cash flow, Corporate investment, Corporate profitability, Firm, Firm level, Firms in the South, Global, Indexes firm, Labor costs, Labor share, Labor share, Minimum wages, Panel data, Panel regression model, Regression model, Size group, Wage adjustments, Wage growth, Wages, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/038
Stock No:

WPIEA2020038
ISBN:

9781513529721
ISSN:

1018-5941

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