Labor Market Institutions and Flexibility in Italy - A Critical Evaluation and Some International Comparisons

Labor Market Institutions and Flexibility in Italy: A Critical Evalutation
and Some International Comparisons by Dimitri G. Demekas

This paper surveys labor market institutions in Italy in three broad
categories: employment protection legislation (including hiring and
dismissal rules, employment contracts, and regulation of working time);
unemployment benefit systems; and the wage bargaining system. Research and
debate on this topic has recently intensified, prompted by the impact of the
recent recession on the labor market, and has informed to a great extent the
changes--some of them fundamental--that have been taking place in this area
during the last few years.

The main conclusions are that Italian labor market institutions have,
until very recently, been restrictive and often ill-suited for the tasks
they were supposed to perform. Employment protection legislation was among
the most restrictive in the OECD; the unemployment insurance schemes in
place were not equipped to deal with Italy's current unemployment problem;
and the wage setting process, including automatic indexation, was inflexible
(although a gradual shift away from the rigidities of the 1970s took place
during the 1980s). Since the turn of this decade, a number of far-reaching
changes have been introduced, generally in the right direction. The most
extreme restrictions in employment protection legislation (notably in the
area of hiring rules) were abolished; a new unemployment insurance scheme
(the mobility list) was introduced to deal with collective redundancies;
and, in July 1993, the wage bargaining system was fundamentally overhauled.

These changes have been conceived and introduced not as part of a
comprehensive plan to reform the labor market, but rather in a piecemeal
fashion, and--aside from the new wage bargaining system--have generally not
gone as far as they should. Significant restrictions and distortions remain
in dismissal rules, placement services, and employment contracts, making
Italy an outlier among major EU countries. Moreover, these apply only TO
part of the market, aggravating the distortions of the Italian labor market.
The unemployment benefits system is generous to those who are entitled for
benefits, but inequitable and--perhaps more important--does not motivate
skill-building and active job search. Spending on active labor market
programs is not optimally allocated, and public employment services need
improvement. As regards the new wage bargaining system, although the
abolition of indexation has already contributed to wage moderation and is
expected to continue doing so, a full evaluation of the system will have to
wait until new agreements are concluded according to its guidelines.