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Elasticity of substitution and the stagnation of Italian productivity

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  • Daniela Federici
  • Enrico Saltari

Abstract

The aim of this paper is to investigate the roots of the stagnation in the Italian total factor productivity (TFP). The analysis focuses on the specific pattern of technical progress in determining the dynamics of the TFP. This analysis cannot be done with Cobb-Douglas technology, but requires the employment of a constant elasticity of substitution (CES) production function that allows distinguishing between the direction and the bias of technical progress. We employ a CES specification embodying both labor- and capital-augmenting technical change, with a σ less than 1. We obtain three main results. (1) There seems to have been a structural break around the mid-1990s in the direction and bias of technological change; (2) The first half of the sample features a labor-augmenting technical change and a capital bias; and (3) In the second part of the sample, both these characteristics seem to disappear, and the evolution of factor endowments assumes a key role. This fact may be seen as one of the potential causes of the stagnation in Italian productivity.

Suggested Citation

  • Daniela Federici & Enrico Saltari, 2016. "Elasticity of substitution and the stagnation of Italian productivity," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 25(5), pages 503-515, July.
    • Handle: RePEc:taf:ecinnt:v:25:y:2016:i:5:p:503-515
    DOI: 10.1080/10438599.2015.1076195
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    References listed on IDEAS

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    1. Saltari Enrico & Wymer Clifford R. & Federici Daniela & Giannetti Marilena, 2012. "Technological Adoption with Imperfect Markets in the Italian Economy," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(2), pages 1-30, April.
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    5. Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-1357, September.
    6. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
    7. Mallick, Debdulal, 2012. "The role of the elasticity of substitution in economic growth: A cross-country investigation," Labour Economics, Elsevier, vol. 19(5), pages 682-694.
    8. Filip Abraham & Jozef Konings & Stijn Vanormelingen, 2009. "The effect of globalization on union bargaining and price-cost margins of firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(1), pages 13-36, April.
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