Date of This Version

May 2007

Abstract

The paper provides new empirical evidence on the relationship between environmental efficiency and labour productivity using industry level data. We first provide a critical and extensive discussion around the interconnected issues of environmental efficiency and performance, firm performances and labour productivity, and environmental and non-environmental innovation dynamics. The most recent literature dealing with environmental innovation, environmental regulations and economic performances is taken as reference. We then test a newly adapted EKC hypothesis, by verifying the correlation between the two trends of environmental efficiency (productivity, namely sector emission on added value) and labour productivity (added value on employees) over a dynamic path. We exploit official NAMEA data sources for Italy over 1990-2002 for 29 sectoral branches. The period is crucial since environmental issues and then environmental policies came into the arena, and a restructuring of the economy occurred. It is thus interesting to assess the extent to which capital investments for the economy as a whole are associated with a positive or negative correlation between environmental efficiency of productive branches and labour productivity, often claimed by mainstream theory dealing with innovation in environmental economics. We believe that on the basis of the theoretical and empirical analyses focusing on innovation paths, firm performances and environmental externalities, there are good reasons to expect a positive correlation between environmental and labour productivities, or in alternative terms a negative correlation between mission intensity of production and labour productivity. The tested hypothesis is crucial within the long standing discussion over the potential trade-off or complementarity between environmental and labour productivity, strictly associated with sectoral and national technological innovation paths. The main added value of the paper is the analysis of the aforementioned hypothesis by exploiting a panel data set based on official NAMEA sectoral disaggregated accounting data, providing both cross section heterogeneity and a sufficient time span. We find that for most emissions, if not all, a negative correlation emerges between labour productivity and environmental productivity. Though this trend appears driven by the macro sectors services, manufacturing and industry, this evidence is not homogenous across emissions. In some cases U-shapes arise, mainly for services, and the assessment of Turning Points is crucial. Manufacturing and industry, all in all, seem to have a stronger weight. Overall, then, labour productivity dynamics seem to be complementary to a decreasing emission intensity of productive processes. The extent to which this evidence derives from endogenous market forces, industrial restructuring and/or from policy effects is scope for further research. The relative role of manufacturing and services in explaining this pattern is also to be analysed in future empirical analyses. In addition, the role of capital stocks and trade openness are extensions which may add value to future analyses carried out on the same NAMEA dataset.

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