This paper evaluates the dynamics of potential output in Italy in the last ten years by estimating the contribution of capital, labour and total factor productivity using firm level data. The results of this approach based on individual data are compared with those obtained by estimating a production function based on aggregate data, which because of their construction do not adequately capture the existing heterogeneity among firms and in the allocation of production factors.
The estimates based on individual data, when compared with those based on aggregate data, suggest a sluggish performance of potential output before the crisis and a stronger recovery after 2009. The contribution of labour and capital to potential output growth has declined in the last ten years, while that of total factor productivity has been positive and on the increase since 2010.
