Labor Costs and Corporate Investment in Italy

23 Pages Posted: 18 Mar 2020

See all articles by Daniel Garcia-Macia

Daniel Garcia-Macia

International Monetary Fund (IMF) - European Department

Date Written: February 2020


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 1/2 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.

Keywords: National accounts, Labor costs, Financial crises, Capital formation, Unit labor cost, corporate investment, capital returns, corporate profitability., WP, wage growth, capital return, Orbis, labor cost, capital growth

JEL Classification: J31, G35, G31, E01, J3, E2, G21, O4

Suggested Citation

Garcia-Macia, Daniel, Labor Costs and Corporate Investment in Italy (February 2020). IMF Working Paper No. 20/38, Available at SSRN:

Daniel Garcia-Macia (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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