Italy: demographic collapse and falling wages

Both sources confirm that despite the energy shock and inflation, companies have been able to protect (and in many cases increase) their margins. The Mediobanca figure on the EBIT Margin explains the ISTAT figure: companies have 'shifted' costs to final prices, keeping the share of added value remaining in the company coffers high. While ISTAT certifies that the wage share has fallen to an all-time low (~39%), Mediobanca shows companies "more robust than ever", confirming that the wealth produced has not been distributed downwards.

We are not facing an economy in crisis if you look at it from the profit side; the crisis is entirely on the side of wages, which, as the table shows, fell to their lowest ever level (~39% of GDP) just as profits were hitting a record high.

Usually, when it comes to wages that have fallen in Italy in real terms in recent decades, the explanation given is low labour productivity. But first of all, if the share of profits is at its highest, obviously this labour is productive in generating margins for companies. Italian exports have reached 850 billion and as a % of GDP have increased from around 26% to around 35% of GDP, which indicates high productivity. The comparison, however, that economics professors always make is that of labour productivity, with the USA and Germany, and the official statistics of output per worker are higher than in Italy.

Never mentioned instead is the United Kingdom, where many young Italians go to work because of the higher salaries, because compared to Italy productivity is equal or slightly lower. Not to mention that UK exports and industrial production are still much lower than in Italy. Yet wages are higher in the UK.

If we take France, productivity is higher, similar to Germany, higher than Italy and the UK. But France has less industrial production and exports than Italy and has a structural external deficit, while Italy has been in surplus for eight years. These figures are contradictory, because productivity is measured in the manufacturing sector, where Italy is stronger than the UK and France, while the measurement of productivity in the rest of the economy, whether in the service or financial sector, is highly questionable.

the problem lies in the way we measure productivity. Official statistics (GDP / Hours Worked) do not measure physical efficiency (how many pieces go out), but monetary value added. As the data on Asian countries show, which are never compared with Italy because otherwise the whole 'low productivity' hypothesis would fall, Italy (~$74-75) has a much higher statistical productivity than Japan (~$51-69) and South Korea (~$47-64).

We are almost equal to Taiwan, the world leader in semiconductors. Moreover, according to statistics, we have five times the productivity of China, the country where everything is robotized and where salaries in major cities are now around $1,200 per month (with a lower cost of living). China, which is now the first country in the world in automation, robots, use of artificial intelligence, perfect infrastructure, where everything works without delays, appears five times less productive than Italy in the statistics. The explanation is that labour productivity statistics outside of factories, where you can measure it in terms of how many parts come out in how much time, essentially measures the profit margins of companies. This discrepancy exists essentially because 'labour productivity' actually reflects (outside of manufacturing) profit margins and market power.

If an insurance company, a travel company, a gas or electricity company, a pharmaceutical company, a bank, a hotel chain or supermarket, a company that makes chocolate or crisps earns a lot, like margins, then it turns out that 'productivity' is high.

To trivialise, Louis Vuitton and Ferrari are ten times more productive than Benetton and Stellantis. France, for example, has less industrial production and fewer exports than Italy, but is more productive because, for example, it has a very large luxury and financial sector. Labour productivity, at the macroeconomic level, does not measure physical efficiency (how many bolts you tighten), but monetary value added.

The standard calculation is $GDP / Hours Worked. But since GDP is, to simplify, the sum of profits, rents and wages, if a company has enormous market power (a monopoly, a luxury brand, or inflated energy tariffs), that company will be 'productive', even if its employees work exactly the same as those of a competing company.

Secondly, Japan and Korea are less productive than Italy because they have a very low unemployment rate. They would rather keep three people doing the work of one (low statistical productivity) than have unemployed people on the street. This lowers the GDP per hour worked, but maintains social cohesion.

In Asia they basically want to give work to everyone and have zero unemployment, they also want to conquer foreign markets at any cost. They also have more domestic competition and in the financial sector and construction a lot of regulation, as well as in the energy sector. So profits as a percentage of GDP are lower. In Japan to have 1% unemployment they have a lot of 'unproductive' jobs, because they do not maximise profits at the economic system level. China has a very 'low' statistical productivity because for decades it has operated with very low profit margins to destroy global competition. If you sell a product for $10 that the US costs $50 to produce, your 'monetary productivity' will seem 5 times lower, even though you produced the same item. If Italian productivity is high compared to Asia, it means that high value added is generated. Italy's social problem is that this value goes to cover insane energy costs, real estate rents, labour taxes, or remains in the company margins, instead of ending up in the workers' paychecks.

This is a discussion that can be conducted at the theoretical level, citing Sraffa's work on the 'measurement of capital' which showed that there is no 'physical' measure of productivity that is independent of prices. If prices are influenced by monopolies, annuity positions or financial bubbles, productivity becomes a number that only reflects the ability to extract value from the market, not to create it.

If we want to remain at the practical level of empirical data, the most striking case are the Italian banks, which have a phase of extraordinary profitability, total net profits of around 45 billion per year. These profits are not generated by an increase in credit, which for Italian companies was 940 billion in 2008 and is now 750 billion. However, Italian banks are among the most 'productive' in the world if one measures efficiency in terms of revenues and profits per employee.

This is explained by the QE policies that directly supported them and by the spread between current accounts and loans created by the subsequent rise in rates with post-lockdown inflation. In addition to this, for example, Italian banks hold some EUR 350-400 billion of excess liquidity, parked at the Bank of Italy, the result of the years of Quantitative Easing (when the ECB injected money into the system by buying securities) and soft loans to banks. On this excess liquidity, the ECB pays the banks a rate (the Deposit Facility Rate) that today is between 2.00% and 2.50%. After the peak of 4% in 2023, this remains a guaranteed, risk-free return. The real boom in bank profits also stems from the fact that banks receive 2.5 per cent from the ECB on their deposits, but continue to pay almost no interest (often 0.1 per cent or less) on their customers' current accounts.

That of the banks, on which we have dwelt at length because it is resounding (but we could also talk about insurance companies and electricity and gas companies), helps to explain the continuous expansion of profits in Italy at the expense of the employee share, which we have shown in the first table.

In essence, the problem of low wages and employee income share is not explained by the low productivity of the Italian worker, but by profit extraction mechanisms at the level of the economic system. We do not have an economy in crisis, if you look at it from the

side of profits. The crisis is all on the wage side. However, since the demographic collapse and the collapse of the income share of wages go together, we should start talking about how to redistribute income for the benefit of labour, if we are serious about counteracting the demographic decline.