Elasticity of substitution and the slowdown of the Italian productivity

The aim of this paper is to investigate the roots of the Italian total factor productivity slowdown. The analysis focusses on the specific pattern of technical progress in determining the TFP dynamics. This analysis can not be done with the Cobb-Douglas technology but requires the employ of a CES function which allows to distinguish 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-nineties 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; 3) In the second part of the sample both these characteristics seem to disappear, and factor endowments evolution assumes a key role. This fact may be view as one of the potential causes of the Italian productivity stagnation.