Labour market reforms in Italy

Italy’s labour market productivity has been stagnating in the past decade despite numerous reforms. This column gives an explanation why this is so. By focusing exclusively on flexibility, past labour market reforms have completely neglected incentives. There is severe allocative malfunctioning in the Italian labour market. Wages do not reflect sector productivity in the short run, while in the long run they rise in sectors in which productivity falls. Thus, a comprehensive reform of the collective bargaining system is crucial.

Labour market reforms have been at the core of Italy’s political discourse for many years. Reforms, whether proposed or implemented, have concentrated primarily on job flexibility:

• The idea that hiring and firing costs should be reduced;
• That lay-offs should not result in costly and uncertain legal controversies (e.g. the debate around article 18 of the Labour Statute);
• That labour contracts should ensure flexibility without creating job insecurity;
• That workers’ rights and protections should be equalised, overcoming the duality between protected ‘insiders’ and flexible ‘outsiders’.

By focusing merely on flexibility, past labour market reforms have completely neglected a crucial aspect: the one of incentives. In order for the most productive firms to be able to attract labour and capital, salaries must reflect productivity, otherwise flexibility may have perverse consequences on productivity growth.

The analysis draws two main conclusions, which highlight a severe problem in the allocative role of the Italian labour market.

Since 2000, Italian salaries have grown more in those sectors in which productivity has increased less.

In the short term, employment has moved towards sectors where labour productivity increased less.

via Wages, productivity, and employment in Italy | vox.