Friday, April 27, 2007

Italian Productivity

This is an excerpt from the economist Charles Wheelan, Ph.D.:

To get your mind around the concept of productivity, imagine a small, insular farming village in which all of the good land is being farmed and every household grows or makes whatever it uses -- from food to the house itself. Further suppose that a stranger walks into town looking for work.

If you subscribe to the "lump of labor" theory, then this guy is out of luck. The only way he could go to work would be by farming part of someone else's land. If he eats more, someone else must eat less.

But that's not how the world works. Suppose the guy who walks into town has figured out how to build a more effective plow. He can sell his plows to farmers, who will pay for them with a share of their more bountiful harvests. Not only will our stranger have a job, but the farmers will be growing and eating more -- even after paying for their new plows.

We can do it again: A second stranger walks into town and offers to set up a school -- or make clothes, or build houses, or design irrigation ditches, or do anything that frees up the farmers to spend more time cultivating their crops. Again, crop yields go up. And again, we've created another job.

Productivity is an important aspect of growth. Population growth and other factors are not as important as productivity, which is usually a better estimate for economic growth.

Currently, Italy is making reforms to its public sector in an attempt to curtail some of its reputation for poor public service and increase productivity. There was an agreement between Luigi Nicolais, the minister in charge of public reform, with the trade union federations – CGIL (Confederazione Italiana Generale del Lavoro), CISL (Confederazione Italiana Sindacati Lavoratori) and UIL (Unione Italiana del Lavoro) – which represented state employees at negotiations.

The public sector has had a long history of red tape and slow progress. Stories of checking out a book at an Italian university taking upwards of a month were common place. Currently, it takes an average of 35 days to setup a private company in Italy, while it takes 7 days in the UK.

The agreement will affect 3.5 million employees. It will include reforms such as goal based incentives where managers are assessed by reaching these targets. Also, career advancement will no longer be a function of years in service. Additionally, unused funds can be reinvested and used at a later date, which should curtail unnecessary spending. Unused labor will be transferred to other departments that need it.

Critics point out that managers still have no power to transfer workers who refuse to move to another area where they would be more useful. Furthermore, they argue that because the reorganisation of public departments and offices must agree with the trade unions this effectively gives the unions a veto over management decisions.

These are just small reforms of many that would be necessary to improve Italy's economic troubles. Some scholars suggest the increased labor supply has caused the Italian stagflation. This fact points to more interest to the Italian immigration issue. If there is no education supplied to these new workers, it can cut the productivity of everyone.

Not just the lesser public servants should see reform. The Italian Members of European Parlaimant (MEP) could use a pay cut:

So as Wheelen tells us about increasing productivity, an investment in education, innovation, specialization, and sensible tax and regulatory policies are what are necessary to maximizing productivity. The public sector reform is just one small part of one of these elements.


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