ISTAT's GDP revisions better explain the employment-output puzzle.

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Istat has released the revised national accounts for the two-year period 2023-2024. The update incorporates definitive information on business performance and employment, following the March estimates. As often happens in these exercises, the adjustments affected both GDP and public finance aggregates.

The key finding is the upward revision of GDP. At current prices, the 2023 level has been increased by €11.2 billion, while the 2024 level has been increased by €7.4 billion. In real terms, growth for 2023 has been raised to 1 percent (+0.3 percentage points compared to March), while the estimate for 2024 remains at +0.7 percent. Consequently, public finances also show a marginal improvement.

The deficit in 2024 will remain at 3.4 percent of GDP (but an improvement of €1.6 billion), the primary balance will rise to 0.5 percent (+0.1 percentage points), public debt will fall to 134.9 percent of GDP (-0.4 percentage points), and the tax burden will decrease slightly to 42.5 percent (-0.1 percentage points). These data reinforce the hypothesis, raised by Economy Minister Giancarlo Giorgetti, of a deficit that will already fall below 3 percent this year, bringing forward the end of the European infringement procedure by one year.

These figures confirm a trend already observed over the past two years: preliminary estimates underestimated the level of economic activity, with revisions compounding in the same direction. Already at the beginning of 2024, we warned in Il Foglio that Italian GDP could be higher than recorded, and subsequent corrections confirmed this, accumulating differences of several percentage points.

These adjustments are part of a long-running debate over the so-called "employment-output" puzzle, or the disconnect between GDP growth and employment growth. Since 2021, data have repeatedly shown dynamics inconsistent with historical experience, productive specialization, and the narrative of fiscal stimulus : phases of anomalous productivity, followed by periods in which employment increased more than GDP. Today's revisions mitigate some discrepancies, but do not eliminate the problem, as the puzzle is divided into three phases . We review them below.

First phase: the productivity boom. Between early 2021 and mid-2022, the Italian economy experienced an increase in output that far exceeded the increase in employment. If we set both indicators to 100 in 2019, employment had returned to 100 after the recession in 2022, while real GDP was 104. This gap represents a productivity increase that is difficult to explain, given the structure of the Italian production system and the nature of fiscal stimulus, which is concentrated primarily in low-value-added sectors. The literature has yet to provide a convincing interpretation of this productivity boom, and we therefore remain in the realm of hypotheses.

Second phase: negative productivity growth. Since the second half of 2022, the trend has reversed: employment has grown at a faster rate than GDP. This aspect has received considerable media attention (and some literature) because the data pointed to a steadily declining productivity. In this sense, Istat's revisions have only partially alleviated the puzzle: a few weeks ago, they reduced employment estimates ("Italy has 120,000 fewer people in employment than it thought," Capone and Trezzi, Il Foglio, September 5) and, on the other hand, GDP levels. But as mentioned, the puzzle has not disappeared even after the adjustments, as employment growth rates have remained higher than output growth rates. Furthermore, a point that has been completely overlooked in the debate remains to be emphasized: despite the dynamics of the last two years, today's productivity level is still higher than in 2020 (i.e., GDP remains above employment), precisely thanks to the unexplained productivity boom in the first part of the puzzle.

Third phase: the 2025 adjustment. In recent months, with the downward revision of the employment figure, the picture has changed again. On the one hand, the slowdown in employment has brought its growth rate more in line with that of GDP, mitigating the trend misalignment. On the other, however, productivity per worker has recovered, reactivating the puzzle on another level. Essentially, one anomaly has been reduced, but at the cost of reinforcing another.

The employment-output puzzle is therefore a complex phenomenon in post-Covid national accounting data. The first phase (2021-22) remains unexplained, the second (2022-24) is characterized by employment growth outpacing GDP, a phenomenon attenuated but not resolved by the revisions, and the third (2025) saw corrections to employment that changed the picture, but did not eliminate the contradiction. In short, we remain far from solving the puzzle. In this context, the only certainty is that the post-Covid economic cycle has been underestimated, both by statistical institutes and, consequently, by economic policy. Looking ahead to the coming weeks, following Fitch's upgrade, this is certainly an element that other rating agencies will also be able to assess, and which the market is discounting with the narrowing of the spread.

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