Italy Needs to Step up its Labour Law Reforms to Regain Competitiveness

 

Italy’s current political void in the wake of the February 2013 elections is not its only problem. Despite high productivity and a thriving manufacturing industry, it has a rigid two tier labour market which overly protects permanent workers, yet gives temporary workers (often the young) very few rights under its current employment laws, both of whom are more likely to be unemployed. This is contributing to a widening income gap in the country. It has taken steps to reform its labour laws in 2012 but the reforms do not go far enough. Now that it lacks decisive leadership to introduce such changes, its competitiveness may wane. Unemployment is also rising due to the labour market rigidity, burdening the welfare system, hindering its ability to reduce its spiralling public debt and harming real GDP growth.

Italy Unemployment Rate/ Youth Unemployment Rate: 2007-2012 % of economically active population / % of economically active population aged 15-24

Percent of economically active population and percent of economically active population aged 15-24

Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics/OECD

Many aspects of Italy’s labour market are very attractive to investors. Its population is educated and it has a thriving manufacturing industry, which has proved more recession resistant than expected. Unlike many Western European markets which have seen their employment in manufacturing decrease as manufacturing jobs are transferred to emerging markets such as Vietnam and Indonesia, Italy’s proportion of the population employed in manufacturing has actually increased from 21.0% of the total employed population in 2007 to 22.9% in 2012. This is because its manufacturing industries are niche and high end, such as quality leather goods, textiles automotives and food products. Its labour productivity, defined as GDP per person employed is also high at US$78,557 in 2012, above the Western European average (US$ 74,681).

Italy’s labour laws remain overly rigid despite some reforms

Yet despite the positive aspects of its labour market, Italy’s labour laws remain overly rigid, acting as a deterrent to foreign direct investment inflows and contributing to an unemployment rate of 10.7% of the economically active population in 2012. This compares unfavourably to Germany, another economy with a similarly robust manufacturing sector but yet had a rate of just 5.5% in the same year. Italy is ranked 127th out of 144 economies for the quality of its labour market efficiency in the Global Competitiveness Index (GCI) 2012. It ranks particularly poorly for the flexibility of wage determination (138th) and hiring and firing practices (136th). Its labour laws governing permanent employment, put into place in the 1970s with the aim of giving workers a job for life, are so rigid that most employers circumvent them entirely when hiring new staff, opting for fixed term contracts instead.

Negative impact of Italy’s rigid labour laws

This widespread use of fixed term employment contracts is contributing to job uncertainty for many, reducing consumer confidence, retail sales and real GDP growth.

The difficulty in firing workers has led to Italy having a youth unemployment rate of 37.1% of the economically active population in 2012, the 4th highest in Western Europe as employers fear hiring inexperienced workers that they may not be able to dismiss. This is straining the welfare system and preventing Italy from making meaningful inroads into reducing its dangerously high levels of public debt.

More reforms needed to encourage use of permanent employment contracts

In 2012 it introduced tax breaks for companies which hired females and the under 35s. Monti implemented reforms designed to make the labour market more flexible in 2012. These
included limiting the length of apprenticeship duration and number of apprentices a company can have, lengthening the time period which must pass between consecutive fixed term contracts, and reducing the use of reinstatement in a job as a remedy for successful claimants in employment law disputes. Yet Italy needs to do more to encourage the use of permanent contracts rather than just making it more unattractive to hire temporary staff. Also, the changes to its apprentice laws may make employers even less likely to hire apprentices as the number they can take on at any given time will be limited. If it does not make more sweeping reforms, it is likely to be left with a generation who have been unable to get a foot on the job ladder, sizeable welfare bills and reduced competitiveness.