Low productivity gains set in motion a vicious circle: The case of Italy

The vicious circle set in motion by a lack of productivity gains, which we illustrate with the case of Italy, has the following components: The lack of productivity gains leads income distribution to skew against earnings, as it is impossible to prevent real wages from not rising at all; The fall in earnings both weakens investment directly and leads to financial problems for companies, leading to problems for banks and a fall in credit supply, further weakening investment; Weak growth erodes public finances, leading to a risk of a rise in interest rates that is also negative for investment; Faster growth in wages than in productivity erodes cost competitiveness, leading to market share losses, which are another factor driv ing down corporate investment; Last, as all these mechanisms combine to weaken investment, productivity is further reduced by underinvestment, hence the vicious circle. A country like Italy caught in this vicious circle must break out of it, which requires at once helping companies to invest more and supporting everything that has a direct positive effect on productivity (R&D spending, improved skills, etc.).