Is government debt a burden on workers' income share? An investigation on Italian dynamics

Abstract This paper aims to explore if there is a connection between public debt and wage share; the intention is to contribute to the literature regarding both the efficacy of fiscal policy and financialisation of economics. The paper examines the case of Italy between 1960 and 2019, a rather long period during which the country, much like many other advanced economies, was affected by the contemporaneous presence of deteriorating public accounts and a reduced share of national income going to labour. The empirical analysis employs a long run dynamic technique and finds that an increase in debt decreases wage share, challenging the effect of fiscal policies on employment and national income. However, when distinguishing between the components fuelling debt, the estimates reveal controversial outcomes: primary deficit increases wage share, while interests in public debt decrease it. The results are consistent with the changes in policy strategy that occurred in three subperiods and suggest that public debt should be managed, accounting for the reciprocal effects of fiscal and monetary policy and considering the introduction of a common safe asset to preserve labour income.