Italy's Industrial Great Depression: Fascist Price and Wage Policies

Abstract

Industrial production and employment in Italy were hard hit by the Great Depression, and remained below trend until at least 1936. Few quantitative studies have been conducted on the causes of Italy's recession and slow recovery. Using monthly data, and reviving an aggregate supply model published in Bernanke and Carey [Quarterly Journal of Economics111 (1996), 853–883], we empirically test whether Italy's 1930s industrial performance could be related to the Fascist wage and price policies, which, aiming at keeping workers' real wages constant, actually raised firms' labor costs, computed as nominal wages deflated by wholesale prices, hence stalling industrial production. We find evidence of a strong countercyclicality of real wages and of nominal wage stickiness in the period 1929–1936, which would confirm our hypothesis. Trade restrictions are found to play a smaller role in hindering industrial production than previously stated in the literature, whereas we confirm the weak transmission of financial turbulence to the real economy.

Labor Markets Between the Two World Wars: Estimates for Interwar Italy, 1921-1939

“…The analysis of demand and supply-side frictions on the level of unemployment in Italy are less looked at in the existing literature. Perri and Quadrini (2002) and Giordano et al (2014) the primary examples of empirical tests on the premise of supply-side frictions on the economic cycles and, therefore, unemployment in Italy during the 1930s. The latter shows that the great majority of the economic downturn in the 1930s can be explained by trade restrictions, whilst real wage rigidities only accounted for a fourth of them.…”

Long‐run Factor Accumulation and Productivity Trends in Italy

“…industry and private services), confirming and complementing more recent reappraisals of Italy's Great Depression based on industrial production data (e.g. Giordano et al ., 2014; Giordano and Giugliano, 2015). Productivity growth in agriculture was instead supported by active policies by Benito Mussolini's regime, such as land reclamations and significant irrigation works (Toniolo, 1980).…”

“…Only in the 1930s, the dynamic reallocation effect turned out to be quantitatively important, even more so than the pure productivity growth effect; interestingly, these years coincided with the Fascist autarchy period, when state aid to key strategic sectors, which were not necessarily the most productive, abounded (e.g. Toniolo, 1980; Giordano et al ., 2014; Giordano and Giugliano, 2015). 16…”

“…This study, together with Giordano et al . (2014) and Giordano and Zollino (2017), suggests that aggregate growth in Italy in the 1930s was hampered by restrictive domestic competition policies that the Fascist regime introduced as a reaction to the 1929 Great Depression.…”