Southern Italy's Economy Underestimated

September 12, 2010

While it's true that poverty and unemployment are higher in Southern Italy than in the more industrialized North, the extent of these disparities has been greatly exaggerated because a large segment of the South's economy is underground and continually overlooked in official statistics. Two papers bring this fact to light.

But the third factor, somewhat alleviating the second, is the existence of a far vaster private sector than ever shows up in the economic statistics. The size of the lavoro nero sector and the black market in the South clearly exceeds that of any other EU region, a fact that can now be persuasively demonstrated. According to Italstat, the most reliable source of national economic statistics, "black" labor in the Mezzogiorno amounted to an even fifty percent of all "jobs" by the end of 1998. Six months later, Italstat raised its figure to 51 percent. The figure for the North was bad enough — 31.5 percent — but more in line with other Mediterranean EU countries. For any projection toward 2007, however, it is the trend that must be noted. Italstat found that the gap between North and South was growing continually wider. Indeed, when actual laborers were counted (rather than jobs), the South's percentage was double that of the North and Center.

These raw figures require a closer look, because one economist's analysis of Calabria found low pay, high unemployment, and a very high level of consumer spending. In 1994, the government insurance agency placed the number of business enterprises in Calabria at 23,758, while Istat, carrying out the 1996 census, found about 90,000 businesses in the same region. The economist Domenico Marino concluded, on the basis of 4,000 interviews in Calabria, that 75 percent of the Calabrian work force would refuse a fairly low-paying job, despite a very high official level of unemployment. In Calabria, with its dire employment figures, 84 percent of the families own their own home. What such anomalies must mean is that real income in Calabria is far higher than what is "on the books." Many among the vast numbers of officially unemployed are, in fact, partly or fully employed. They are earning no social benefits, but they are earning the daily lire that keep their families afloat.


A very large part of the South's hidden labor is made up of entrepreneurs, sometimes also employing black labor, and existing themselves outside official recognition, taxation, protection, control, or counting. A recent analysis concludes that "there exists in several zones of the Mezzogiorno a whole fabric of small and very small businesses that escape every census, but that work and make profits, share among themselves a serious level of production, export to other regions [of Italy] and abroad." A map of the South's submerged economy shows a series of ink blots in every region, "where work is done without any controls, safe from the tax collector but not safe from accidents and injuries, usually in violation of a number of laws [governing commercial outlets, working conditions, etc.], totally outside official cognizance."

Every year brings plans either to stamp out or to "regularize" the South's submerged economy. But a professor of political economy at the University of Naples warns to go slow: "if we observe these initiatives carefully the image of a Mezzogiorno that is forever the panhandler does not seem to be confirmed. What confronts us is a creeping vitality, almost a new frontier." According to Professor Meldolesi, the submerged economy is several times bigger than officially estimated.


In most cases, "black" workers suffer no risk from the State. Controls on black labor are few and not enforced. Yet they live dangerously. They work — sometimes doing heavy and dangerous work — with no social net, no pensions (other than the minimal social security that everybody gets), no other welfare assistance, no protection at the work place, and no control over labor conditions. The State is nowhere present in their lives, as either law-enforcer or protector.

This massive sector skews all the statistics. It means that the GDP for the Italian South (and for Italy as a whole) is far from accurate. And the unemployment figures do not reflect reality.

Burnett and Vaccara. "Looking to 2007: Italy Times Two". Center for Strategic & International Studies (CSIS), 1999.

As mentioned when discussing Figure 1 (see also Jones and Riddell, 1999), the definition of unemployment is unavoidably less than clear-cut. In Italy, as we discuss below, several types of temporary layoff, non-market employment, and 'activation' programs make up a gray area of individuals who are not really employed but (as is the case for ALMP participants in other countries) are not counted as unemployed.

Further, official employment statistics (though not, at least in principle, the survey-based ones) may be imprecise due to undeclared or 'black' employment pools. The shadow economy is important in Italy and, like in other European countries, its size trends up in time: different estimates suggest that shadow activity increased by some 10-15 percent of GDP in the 70s to some 30-40 percent in the 1990s. This upward trend parallels that of Italy's aggregate unemployment rates. Not surprisingly, and quite interestingly from the institutional perspective we lay out below, the incidence of the shadow economy varies importantly within Italy, again quite like unemployment. Regions with low productivity and high unemployment display significantly larger shares of unregistered activities and employment than the country averages. Boeri and Garibaldi (2002) offer a detailed account and analysis of this phenomenon. Figure 6, reproduced from that paper, plots the average shadow employment rate over 20 Italian regions, and shows that shadow employment varies between 10 percent in Piedmont (North-West) and more than 30 percent in Sicily (South). These estimates suggest that the proportion of irregular employment may be as high as 30-35 per cent in the South, around 20 per cent in the Centre and at one-digit level in the North-West and the North-East, the latter macro-region being the one with the lowest level of shadow activity. A portion of this variability may be accounted for by the various regions' heterogeneous production structure. However, it is large within industrial branches marked not only in agriculture, but also within industry, with the South displaying an incidence of shadow employment that is twice as high than in the rest of the country. There is no tendency over time to the narrowing of the regional differentials in the incidence of the shadow economy: in 1995 the South to Centre-North gap was roughly the same as 10 years earlier.

Bertola and Garibaldi. "The Structure and History of Italian Unemployment". CESifo Working Paper Series No. 907, 2003.