Economic dynamics and regional disparities in Italy: an extended application of the Kaldor–Verdoorn law

This paper assesses whether the Kaldor–Verdoorn law explains labour productivity growth in the Centre-North, the South and for Italy as a whole, over the period 1996–2021, across Manufacturing, Construction and Services. It evaluates the role of key supply-side variables – micro-criminality, firms’ credit utilisation, research and development (R&D) expenditure – in shaping labour productivity dynamics. The panel error-correction model approach is employed to identify both short- and long-run effects. To address endogeneity issues, the error-correction models are estimated using limited information maximum likelihood (LIML)-Fuller inference with instrumental variables. The robustness of the Kaldor–Verdoorn law is confirmed for Manufacturing and Construction, with lower elasticities in the South, while Services display weaker yet positive elasticities across all macro-territorial areas. Furthermore, the impact of supply-side variables on labour productivity growth differs across macro-areas.