A Lesson in Economic Statistics from the Shrill One

Paul Krugman explains why Italian productivity has fallen precipitously over the past decade or so:

Dean Baker, in correspondence, makes an interesting point about the mysterious productivity collapse in Italy — namely, that a big chunk of it could be a statistical illusion. This is always something you should consider when you see something strange in economic data.

Here’s the story: Italy, with its combination of extensive regulations and weak enforcement, used to have a lot of “black labor” — workers who weren’t on the books, so as to evade various government-imposed requirements. But then came reforms that made keeping part-time workers, etc., on the books less onerous — and the hidden labor came into the open. Measured GDP wasn’t affected, because statisticians were already making imputations for the shadow economy; so the result was a decline in measured productivity.

It’s a reasonable explanation.  It’s not like Italy has stopped being Italy since 1995.

Entering the Euro zone has brought changes, but nothing that would have their actual productivity dropping off a cliff like this graph pr0n.

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