Take an inefficient public administration, excessive public employment with low productivity and a repressed private entrepreneurship; mix them all together, et voilà: here you have a fairly accurate portrait of the ill Italian economy.
Excessive Public Employment
To offer a practical example: November 2014 in Sicily (a region in Southern Italy) 66 public officials were hired as guardians of Pirandello’s house: a museum, with no visitors yet but more crowded than a traditional Italian wedding dinner. To make a quick comparison let me tell you that Uffizi in Firenze, one of the most important Italian art institutions, has 186 guardians and a surface of 12.680 square meters with 45 rooms full of paintings.
This news alarmingly clashes with the government’s New Year resolutions. In an interview for Il Sole 24 Ore (an Italian national daily business newspaper owned by Confindustria, the Italian employers’ federation), Matteo Renzi reveals the latest proposals in the Spending Review for 2015. A major point is public administration reform; the Prime Minister is confident about the feasibility of the central government’s aim to cut €20 billion, although it barely managed €3 billion this year.
The Renzi Government and the Public Sector
Renzi proudly mentions the introduction of a permanent tax rebate of €80 a month for low-income workers. Meanwhile, consumer spending has seen a drop; taxes on corporate profits have been raised. And there is still little evidence that the proposed labour market reform approved on 3 December will generate growth or employment. Andrea Lorenzo Capussela, an expert in competition policy from LSE argues that although it might be desirable to increase the flexibility of the Italian labour market, this might not be the main obstacle for growth; instead, the key reform focus should be the quality of political institutions and governance standards.
The Academic Perspective on Italian Public Sector Inefficiency
A paper on redistribution through public employment (Alesina, Danninger and Rostagno, 1999) documents the geographical imbalance in the allocation of public jobs between North and South of Italy. The authors find that public employment is used as a subsidy from the wealthier North to the poorer South, estimating that half of the public wage bills in the South can be defined as a subsidy. Emblematic example: the authors find large differences in regional productivity of postal offices: to deliver the same units of correspondence, 179 postal workers are needed in the North, 566 in the Centre and 1.783 in the South. Moreover, opportunities in the private sector are worse in the South, making public jobs much more attractive. A focus on sociological effects leads to the conclusion that this reliance on public jobs in the South leads to a “culture of dependency” and leads to public employment crowding out private entrepreneurial activities.
In a paper on excessive public employment and rent-seeking traps (Jaimovich and Rud, 2013) similar findings are reported: the public sector is larger in poorer Italian regions. The authors propose a theory where excessive public employment causes a lack of opportunities in the private sector; they then develop a rent-seeking model, suggesting that self-selection into public employment by people who exhibit bureaucratic opportunistic behaviour is favoured if bureaucrats’ salaries aren’t set sufficiently low. Individuals with this characteristic will tend to rent seek by employing an excessive number of unskilled workers. This in turn will determine a high wage equilibrium for unskilled workers (due to the increase in demand). Inevitably, there will be some crowding out of entrepreneurial activities due to the increased cost of labour and to potential increases in taxes to sustain public sector costs. The authors point out that despite these inefficiencies, the success of populist governments running bloated public sectors is not surprising; they may indeed be supported by unskilled workers, who indirectly benefit from it in the form of higher wages.
We are all well aware of the political trade-off between unpopular choices and long run economic and social advantages of reforms. To save nations, sometimes we need unpopular decisions. Chancellor Schroeder’s Agenda 2010 is an example of this; “Today, many European countries face similar challenges to the ones Germany did a decade ago”, he writes on the Financial Times, “striving ahead in competitiveness on a worldwide scale must be the priority”.