Elasticity of substitution and the slowdown of Italian productivity

The aim of this paper is to investigate the roots of the slowdown in the Italian total factor productivity (TFP). The analysis focusses on the specific pattern of technical progress in determining the dynamics of the TFP. This analysis can not be done with Cobb—Douglas technology but requires the employment of a CES function that allows distinguishing between the direction and the bias of technical progress. We employ a CES specification embodying both labor- and capitalaugmenting technical change, with a  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; 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.