Public Capital, Employment and Total Factor Productivity: Evidence from Italian Transport Sector

This paper uses time series methodologies to examine the causal relationship among capital stock, total labour force and Total Factor Productivity (TFP) applied to transport sector for Italy, using annual data for the period 1970-2007. After an introduction, a literature review is carried out, before discussing the econometric methodology and data. Stationarity tests show that the series are clearly I(1) processes. Our estimation results indicate that one cointegrating relationship exists among these variables. Moreover, there is a bidirectional Granger causality flow between real public capital and labour force, as well as between public capital and TFP; while productivity Granger-causes labour force but not the other. The Forecast Errors Variance Decompositions (FEVD) show that errors in real public capital are mainly due to uncertainty in labour force and in public capital itself; and the labour force errors also become increasingly due to labour force and public capital; while the forecast errors in productivity are mainly due to TFP itself, although public capital is important as well.