Blog Post

Italy’s “Dignity Decree”

The new Italian government pushed through its first legislative act including elements of labour market reform. Presented as an overturn of the previous government’s “Jobs Act”, the estimated effects of the decree are controversial. We review Italian economists’ view on the matter.

By: Date: July 23, 2018 Topic: European Macroeconomics & Governance

The recently approved “Dignity Decree” is the first legislative act of the new Italian government in the area of the labour relations and, according to Luigi Di Maio, Minister for Labour and Economic Development, it represents an overturn of the previous government’s “Jobs Act”. Among other things, the decree establishes that the maximum length for temporary contracts in Italy will decrease from 36 to 24 months, and the maximum number of renewals will be four rather than five. After the first 12 months, employers will only be able to prorogate temporary contracts if they can claim that specific causes exists why this is warranted. La Voce.info has the full text of both the decree and the attached technical report, including the estimate by INPS (the Italian social security organisation) which approximates that  8000 temporary workers could lose their temporary jobs due to the decree without finding new employment. Ministers Di Maio and Tria issued a joint press release stating that these estimates are deemed “unscientific, and as such, disputable”.

For a more detailed reading, Adapt, a non-profit organisation specialising in studies and research in the field of labour law and industrial relations, has published an ebook on the Dignity Decree. At page 92, it includes Francesco Seghezzi’s chapter on the effect of the decree on the labour market. Seghezzi shows that between May 2017 and May 2018, employment in Italy has increased by 457 000 units, 95% of which were temporary. The restrictions placed by the decree on the temporary contracts longer than 12 months raise the risk to increase turnover among temporary workers – particularly in association with the reintroduced causality requirements. Absent interventions to foster active labour market policies, training, new welfare, and the intervention on the legislation of temporary contracts will hardly yield positive results, in Seghezzi’s view.

Francesco Daveri believes that overall, there is no clear evidence of under- or over-estimation of the phenomena described in the technical report. According to him, he only sure thing is that the aggregate effects will be negative, because the decree increases labour costs which are normally associated to a decline in employment. In this context, it is strange to see finance minister Tria claim that the estimates are unscientific when they were produced by INPS and validated by a department of his own ministry (Ragioneria Generale dello Stato), without providing alternative estimates. Daveri thinks that Tria – who represents Italy in the negotiations in Brussels – has made a mistake in joining so readily the political noise.

Pasquale Tridico, economist and advisor to Luigi Di Maio, gave an interview to the newspaper Repubblica in which he said that the decree “is an optimal text that puts Italy in line with European directives”. He argues that all labour reforms implemented in Italy since the 1990s are consistent with a “dogma of flexibility”, whereas this is the first decree going in the opposite direction. Tridico sees this is as positive, because evidence does not support the idea that the rigidity of labour markets causes higher unemployment. He also thinks that less flexibility may be associated to higher labour productivity due to more investment by firms in human capital and innovation. The technical features of the decree will – according to Tridico – be effective in creating incentives for employers to switch to more permanent (as opposed to temporary) contracts, thus starting a virtuous occupational circle. As far as it concerns the estimated 8000 jobs that could be lost due to the decree, Tridico thinks that these are unlikely.

Pietro Ichino believes that, in this case, the Dignity Decree is contradictory. The law decree aimed at reducing the share of temporary contracts contains provisions that appear destined to increase judiciary litigations. Ichino thinks that the issue of temporary employment can be looked at from two different perspectives: a view “from the left” would argue that if temporary contracts cannot be renewed, it is likely that they will become permanent; and a view “from the right” would argue that the likely result is instead a switch from regular to informal work. According to Ichino, the re-introduction of the “causality” requirements for employers to be able to renew temporary contracts increases uncertainty further and multiplies the risks of litigation which is a cost to both employers and workers. Ichino thinks that if the aim of the decree was really that of limiting temporary employment, then it is difficult to explain why the decree also contains an increase in the penalties that employers would face when rescinding permanent contracts, which is a strong incentive to resort to temporary employment. Ichino concludes that the only effect of the “Dignity Decree” on labour markets will be to increase the volatility of legislation, thus creating a disincentive to invest in Italy and provoking ensuing negative effects on labour demand and on workers’ bargaining power. What all this has to do with the dignity of work remains a mystery.

Stefano Fassina argues that the INPS’ estimates are the result of applying a “neo-liberist paradigm” within which even modest measures aimed at reducing flexibility are associated to a decrease in employment. INPS’ desisionis legitimate, but it is a “political” choice and not the only one available. A keynesian framework would instead suggest that labour demand depends on economic activity (including quantity and quality of of public and private investment as well as consumption) and not on the maximum length of temporary contracts. Within this framework – which Fassina thinks of as legitimate as the one INPS uses – one could argue that more stability increases productivity, growth, wages, consumption, and employment.

Valerio De Stefano believes that “the Waterloo of temporary employment is still very far away”, and that the decree is a limited measure that only deals with categories of temporary workers that are not the most vulnerable. Limiting the abuse of flexibility is a good idea, but for the time being, the strategy seems scattered- similarly in the rebuttal of INPS’ estimates, as the government did not prepare alternative estimates. As for the causality requirements, De Stefano thinks they are not negative per se, but they should be thought of in a different way if the aim is to limit turnover. Particularly, he thinks they should be linked to the specific job rather than the specific worker. De Stefano thinks that labour market reforms should not be evaluated exclusively based on their quantitative effect on employment, but also on the quality of existing employment in terms of remuneration, health, security, access to training or union representation. The decree does not deal with all these qualitative aspects and neither do its critics.

Ferdinando Giugliano writes that the aim of the decree is noble: since the Great Recession and the ensuing sovereign debt crisis, Italy has faced mass deindustrialisation; precarious work is widespread. The government wants to ensure that more workers are hired on permanent, rather than short-term contracts and that businesses keep their plants in Italy. However, Di Maio, who is both labor and industry minister, goes about addressing these problems in the worst possible way. The main reason why Italian companies do not offer more permanent contracts to workers is because the “tax wedge” –  the difference between the cost of labor to the employer and after-tax wages received by the worker – is too high. The new government does nothing to make it more attractive for businesses to hire. In fact, it raises severance pay for workers on permanent contracts, while making temporary contracts more expensive and harder to renew. The likely impact is that the number of temporary hires will decrease without, however, resulting in an increase in permanent employment.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More by this author

Blog Post

Les gilets jaunes

For weeks, protesters wearing yellow motorist vests have taken to the streets of Paris to protest against the rising price of fuel. They have since taken on a wider role, and are seen as symbols of the growing popular discontent with President Macron. Silvia Merler reviews scholars’ opinions about this movement.

By: Silvia Merler Topic: Energy & Climate, European Macroeconomics & Governance Date: December 10, 2018
Read article More on this topic More by this author

Opinion

The great macro divergence

Global growth is expected to continue in 2019 and 2020, albeit at a slower pace. Forecasters are notoriously bad, however, at spotting macroeconomic turning points and the road ahead is hard to read. Potential obstacles abound.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: December 5, 2018
Read article More by this author

Blog Post

Green central banking

A few weeks ago, Silvia Merler discussed the rise of “ethical investing”. A related question emerging from the discussion is whether central banks should also “go green”. Silvia reviews the latest developments and opinions on this topic.

By: Silvia Merler Topic: Energy & Climate, Finance & Financial Regulation Date: December 3, 2018
Read article More on this topic More by this author

Blog Post

Machine learning and economics

Machine learning (ML), together with artificial intelligence (AI), is a hot topic. Economists have been looking into machine learning applications not only to obtain better prediction, but also for policy targeting. We review some of the contributions.

By: Silvia Merler Topic: Innovation & Competition Policy Date: November 29, 2018
Read article More on this topic

Blog Post

Youth unemployment: Common problem, different solutions?

Youth unemployment is a major obstacle to the Middle East and North Africa (MENA) region’s human and economic development. In this blog post, Uri Dadush and Maria Demertzis go into the factors behind the its surge.

By: Uri Dadush and Maria Demertzis Topic: Global Economics & Governance Date: November 29, 2018
Read article More on this topic

Opinion

Italy’s floods: How the European Union Solidarity Fund can help

The authors discuss Italy's potential recourse to disaster relief from the European Union Solidarity Fund in the wake of recent floods, focusing specifically on how much aid Italy might expect and under what terms.

By: Antoine Mathieu Collin and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: November 23, 2018
Read article More on this topic

Blog Post

Could Italian private wealth compensate for flight of foreign bond-holders?

Italy’s deputy prime minister Matteo Salvini is "convinced" that Italians can help out their government, in the face of a widening yield spread between German and Italian government bonds. The authors assess the feasibility of recourse to household wealth in Italy, and estimate the relative importance of foreign debt-holders in the upcoming bond redemptions.

By: Jan Mazza and Silvia Merler Topic: European Macroeconomics & Governance Date: November 19, 2018
Read article More on this topic More by this author

Blog Post

The Brexit withdrawal agreement

On November 14th the UK government cabinet approved the draft text of the withdrawal agreement, the deal reached between EU and UK negotiators. The decision was followed the next day by the resignations of several members of Parliament. We review the first reactions in the blogosphere.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 19, 2018
Read article More on this topic More by this author

Blog Post

What the 2018 EBA stress tests (don’t) tell you about Italy

The results of the latest European Banking Authority stress tests were eagerly awaited for their results on the four biggest Italian banks. At first sight, these banks seem well prepared to withstand an adverse macro-financial shock. But judging by the market reaction following their publication, the results have not appeased investors.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: November 15, 2018
Read article More on this topic More by this author

Blog Post

US mid-term elections and the global economy

Democrats won control of the House and Republicans held onto the Senate in the most consequential US mid-term elections in decades. Bowen Call reviews economists’ and scholars’ analyses of the impact this might have on the world economy.

By: Bowen Call Topic: Global Economics & Governance Date: November 12, 2018
Read article More on this topic More by this author

Blog Post

The consequences of Italy’s increasing dependence on domestic debt-holders

Bruegel’s updated data set of sovereign bond holdings illustrates how a rising share of Italian debt is held by domestic investors – a development with particularly significant implications, in the context of the Italian government’s disagreement with the European Commission over spending plans outlined in its draft budget.

By: Jan Mazza Topic: European Macroeconomics & Governance Date: November 6, 2018
Read article More on this topic More by this author

Blog Post

Jair Bolsonaro’s Brazil

Far-right candidate Jair Bolsonaro won the Brazilian presidential elections after a highly polarising campaign. We review economists’ and scholars’ views of what this means for Brazil going forward.

By: Silvia Merler Topic: Global Economics & Governance Date: November 5, 2018
Load more posts