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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.


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