Italy's Human Capital: A Key Social Factor for Economic Development



Italy's economic outlook depends on a series of structural factors, including its human capital development, which is highly influenced by a complicated mix of Italian firms' demand for labour, the quality of the education system and the low activity rate. Over the years, despite an improving trend, Italy lags behind major European Union (EU) peers in educational attainment, as well as in adult participation in education and training. This weighs on the country's workforce skills and contributes to weak labour productivity with sizeable regional disparities. Few job opportunities and demand for low-skilled labour in some regions, particularly in the south and islands, accompanied by relatively weak incentives to obtain higher education fuels a vicious cycle. At the same time, the high share of young people not in employment, education and training (NEET) and the low activity rate weigh on the labour supply and in turn on overall human capital development. The quantity and the quality of Italy's labour supply, in light of the declining working age population, will play an important role in the economy's growth potential, a key factor for Italy's debt sustainability, and in turn its rating (BBB (high), with Negative Trend). In a forthcoming publication DBRS Morningstar will assess the government's initiatives to improve the education system.

Key highlights include:
• Human capital contributes to Italy's weak productivity. Relatively poor workforce skills compared with major EU peers is the result of Italy's economic structure, the relatively low quality of the education system, and the high share of NEET and low activity rate.
• A large share of small and medium sized enterprises (SMEs) investing relatively low amounts in research and development leads to weak demand for skilled workers.
• A low number of mean schooling years, still few graduates particularly in the ICT sector and low participation in education and training, constrain the quality of the labour supply, and in turn, Italy's GDP potential.

With an increasing number of people retiring and still low immigration flows, Italy's working age population will continue to decline in coming years. This requires greater focus on human capital development, a factor that typically is largely considered secondary to physical capital to explain Italy's weak growth potential and labour productivity. While the north of the country performs better, beyond the reform effort to improve the structure of the economy, additional focus on the quality of the education system could encourage female labour participation as well as reduce the number of younger NEETs, particularly in the south, notes Carlo Capuano, Vice President in the Global Sovereign Ratings Group.