Employment is rising and productivity is falling: the media paradox

In the prevailing narrative, there is a persistent misunderstanding regarding the interpretation of statistical data intended to provide information on the Italian economy. We shall call this the ‘paradox of the average’. In recent years, employment in Italy has been growing robustly and steadily. The number of hours worked is rising, as is the number of people in work. Female employment is rising, albeit less so than male employment, and youth employment is also rising. The unemployment rate is falling and the employment rate is rising. The rate of economically inactive people is also falling slightly. Looking at the statistics, however, it is clear that, compared with the European average, the employment rate is much lower – particularly for women – whilst the rate of economic inactivity is higher. Do these latest negative figures cancel out the positive aspects of the previous ones? It would not seem so. They indicate that there is still plenty of room for improvement and a long way to go, but we are finally on the right track.

But the real criticism, which seeks to undermine the relatively positive performance of the Italian economy, lies in highlighting that productivity in Italy continues to fall. The reference is, of course, to average productivity. This conveys the impression that the Italian economy is deteriorating by emphasising that ‘on average, each hour of work generates less output than a year ago’ and that this highlights the limitations of the Italian growth model, which relies on increasing output by increasing the amount of labour employed. What does it mean to say that average productivity has fallen? It would be a cause for concern if the same number of workers were producing a smaller quantity of output, resulting in lower average productivity. But the data do not suggest this, nor do they suggest that, as employment rises, all workers are producing less. They do show that not all new workers have productivity equal to or higher than that of the existing workforce, and they show that existing workers have not increased their productivity enough to offset, on average, the lower productivity of the new entrants. To put it simply: if 100 workers produce 1,000, we have an average productivity of 10. If we add 100 workers to this group who produce 500, we will have 200 workers producing an average of 7.5. Average productivity has fallen! Are we worse off? Perhaps not. No individual worker is producing less. No business has seen a decline in its efficiency or productivity, but we now have an additional number of businesses and workers who were not there before and who are now producing added value and generating income, albeit to a lesser extent than the pre-existing ones.

Naturally, we would all like to see a further increase in the productivity of businesses that are already at the cutting edge of technology, and for new employees to be more productive so that they can enjoy higher personal incomes and contribute to faster growth in the Italian economy. However, this is not the place to discuss the reasons why this is not happening to a satisfactory extent, nor the possible policies that could be adopted to achieve this. Here we are discussing what we consider to be a sort of interpretative hallucination regarding the data that Istat provides us with as averages of broad aggregates.

The figure showing a decline in average productivity does not, therefore, negate the generally positive employment figures, but simply defines their characteristics, which, moreover, are by no means negative overall. We recall a book by Edmund Phelps, "Rewarding Work" (1997) – which remains highly relevant today – in which he fuels the debate on modern economies that face the problem of integrating citizens with very low productivity into the labour market and, therefore, on possible ways of setting wages which, if commensurate with low productivity, would fail to attract citizens into the labour market – citizens who would otherwise remain marginalised and engaged in irregular work. The fundamental issue raised by Phelps was the value to society of labour inclusion as a source of social stability. It is worth considering how, in years when social instability has increased in many European countries – with immediate effects on political instability and the rise of political extremism – Italy still enjoys enviable social and political stability thanks to rising employment, even in sectors with lower productivity: lower labour productivity – conventionally measured as value added per employee or per hour worked – does not always reflect a lack of efficiency, but often a weaker market position. These observations prompt broader reflections on the measurement, meaning and determinants of productivity.

Firstly, the inclusion of workers who have been excluded due to market imperfections and distortions – even if this is not recorded as an increase in labour productivity – boosts the overall efficiency of the economic system, which is otherwise diminished by the social costs of marginalisation and exclusion. Without necessarily calling for measures more sophisticated than GDP, we must also bear in mind that productivity estimates do not reflect variables such as voluntary work, care and domestic work, civil and religious associations, and public services in general. All these activities are valued at the cost declared in the public accounts, and are therefore, by definition, excluded from any possible increase in productivity, even though they play an increasingly significant role in the material and moral well-being of citizens.

Finally, we should add a measure of the quality of work to the usual productivity estimates, which translates into the accumulation of human capital and its social value. Work, in fact, is not merely an input but also an output of the production process, characterised by generativity – that is, the capacity to generate results not only in material terms, but also in terms of a sense of purpose, inclusion, participation and commitment. If these dimensions are taken into account, the labour reserve and the potential for extended productivity growth remain high for Italy. The employment rate for those aged 15–64 stands at around 62 per cent, compared with an EU average of approximately 71 per cent. The gap for women is even wider, and there are around 12 million people of working age who are economically inactive. In terms of stock, there is still considerable scope not only for growth but also for developing a higher level and quality of social participation by increasing employment. Ultimately, the paradox of the average stems from a sort of accounting fallacy, which fails to take into account the fact that, when the totals change, their composition changes too. A fall in average productivity whilst employment and hours worked rise is, to a large extent, the result of workers and activities previously excluded from measured production entering the workforce. This is a positive development, because participation has an intrinsic social value; a value that, however, remains overshadowed, given that the entry of new workers can lower the average without any individual having become less efficient.

The right question is not why productivity is falling, but how to ensure that those entering the workforce today with low productivity do not remain stuck there tomorrow. This is where the challenge of economic policy lies: training, the organisation of work, the dissemination of technology, and competition in markets and value chains, where low added value often reflects, rather than inefficiency, the weak bargaining power of the most vulnerable businesses.