The Sense of the Word “Reforms” in the Italian Labour Market

Today on Regional Studies Association Blog

https://www.regionalstudies.org/news/the-sense-of-the-word-reforms-in-the-italian-labour-market/#

Jel codes: E61, J21, J68, O52

Keywords: Policy Designs and Consistency, Labor Force and Employment, Labour Market Laws, Europe

The situation

Today in Italy, we are experiencing a 10% unemployment rate (about 45% for young people in the southern regions), a relationship debt/GDP close to 136%, an increasing level of poverty and inequalities[1], and a form of stagnation in production (Daniele, 2015). It is very surprising that all these variables have changed in this way during the last 20 years of “reforms” regarding public pension and the labour market, due to aims to relaunch occupation and production. What is wrong with that? These kinds of reforms are not wrong in all cases, but as far as the Italian economy is concerned, they are absolutely wrong and dangerous for the future.

Structure of the Italian labour market and reforms

It was a common opinion, for mainstream economists in particular, that the market of labour was blocked by unions and laws that protect workers and did not include the unemployed. This kind of interpretation of reality pushed the governments to propose “reforms” based on the assumption that unemployment is caused by the difficulties of entrepreneurs to coherently dismiss non-productive workers and replace them with productive workers, in accord with the search-matching economic models (Chad et al. 2017). At the same time, there are a lot of differences between the north and south of Italy. In the former, the unemployment rate is close to the average of the EU. In the latter, there is one of the higher unemployment rate of the EU, and this fact suggests that we have two different economic systems in terms of the equilibrium of production and labour market structure (Perri, 2014). Moreover, there weren’t a lot of opportunities to work in the public sector because new assumptions were blocked by law[2] due to the tragic situation of public debt. According to assumptions of the neoclassical theory, from 2001, there are 46 new forms of “atypical contracts[3]” for the labour market that make the Italian job market one of the most flexible in the world (Franceschi and Mariani, 2015). In consequence of that, we have two types of workers: protected and unprotected. The unprotected workers do not have the same amount of wages or the same rights as protected workers. For instance, they can be dismissed at any moment simply because their contract ends. In addition, past governments have increased the retirement age, and for these two measures, new workers in the last 20 years are, by majority, unprotected.

Private workers and public workers

Flexible contracts are, in the mind of the policy makers, designed for private sectors. But on the contrary, they were used by the public sector to overcome the limits of the possibility of hiring new workers. For the most part, public agencies are employing people with “new” forms of flexible contracts. The private and public sectors are not using this kind of contract to increase stable employment, but rather to reduce costs. There are not many protected workers of the public sector, but it is true that they have too many managers with higher wages in respect to other European countries (a good example is a recent comparison between Italian public broadcasting, RAI, and Britain’s public broadcasting, BBC[4]).

What’s wrong with that

These kinds of reforms are reducing worker’s income and their capacity to spend. Since the crisis arrived, Italy has paid a big price because there aren’t universal forms for workers’ protection that cover “the new fixed term for workers”. This explains why GDP was declining and the aggregate demand was collapsing. Labour “reforms” with flexible contracts could work if the economy was growing and fewer people were unemployed in respect to the firm’s demand. In Italy, the economy is declining and there are too many unemployed people, therefore, we need to create a new strategy.

The pensions bomb

As we have said before, the last 20 years of “reforms” in the labour market is due to increase flexible contracts. From a different point of view, short-term contracts are also generating a new category of workers in terms of expected pensions – a form of “working poor and retired poor” people. Italians are starting to work later than other EU workers, working for less time than others. And in consequence of fixed terms contracts, they are paying fewer pensions contributions[5]. The last two reforms of job markets are doing additional damage for the pensions scheme. By offering incentives to the job market in the south, the state is telling firms to not pay the entire amount of pensions contributions to workers. So the risk is that these kinds of workers will be poor during the working years and poor also after the retirement age because the pension system will pay the pension in respect to the contribution. This fact could be a basis for a social bomb for Italian society.

What aspects of the Italian job market need to be reformed

In Italy, it is actually very difficult to find a job, as public services of employment are totally unfit (just 1% of the unemployed find a job). The private sector finds workers through personal relationships, private agencies, but also politicians play a role in the job market. The public sector usually employs people by direct recommendation of politicians, especially in the south. A few of these kinds of workers are “fake workers”; they made a deal with politicians – “a vote for a job”. There is no transparency in the selection procedure (for managers, too) and there is no control on the job. So it is not unusual to find people out of work placed by authorities (there have been too many investigations to consider this a casual fact[6]). Unions are wrong because they always defend a business as it is, and they are not able to distinguish “real workers” from “fake workers” in the public sector. For this reason, bureaucracy is very inefficient (Gratton et. al. 2017), and some form of sanction is urgently needed. Unemployed people often start to work in the shadow economy, which is also a place for new immigrants. We can use the same argument for an illegal economy that selects the unemployed and immigrants without permission of residence. In these cases, it is unrealistic to suppose that jobs are created legally. We need an investment as well as some form of protection for the unemployed at the time of recruitment. Wage determination should also be taken into consideration. This kind of control in the public sector has to be extended to the “protected workers” recruitment process.

The type of “jobs act” Italy needs

It’s clear, for the aforementioned reasons, that the reality of the job market in Italy is very complex, so we need complex solutions. There are two types of workers: protected and unprotected. We are two types of public workers: productive and unproductive. We have the unemployed who work in the shadow economy and paid workers who stay at home and benefit from the layoffs of bankrupt companies. To solve such a problem with a single law is, in fact, impossible. We need to change the entire structure of the job market. First of all, the procedure of recruitment in the private sector must be made easier. But at the same time, public workers need more control at both the time of recruitment and wage determination (by evaluation). This kind of control in the public sector has to be extended to the “protected workers” that can be moved or fired in the case of serious inefficiency. Also, wages have to be determined by productivity in all cases and not by seniority of service (like what is happening now). To solve the problem of workers in the shadow and illegal economy, we need a basic income that protects workers from being blackmailed by criminals, entrepreneurs and politicians. These kinds of mixed policies have costs in the short term but are definitely beneficial in the long term.

Conclusions

The last 20 years of changes in the labour market rules (reform of Art. 18 of the Workers Act, flexible forms of contracts, and new full-time contract with increasing protections) were not useful to change the rights of “all” workers. We need to understand what the minimum amount of rights for workers are, protected and unprotected. We need selective policies, more protection for workers of the private sector (without economic support of death care industry companies), and support for workers when they need to find another job while they have to earn a basic income. Due to the lack of verifiable results in the public sector, we need rules to evaluate public workers and eventually dismiss the people unfit for this role, also along a generalized reduction of managers’ wages. Transparency in the selection procedure and evaluation of results are the keys to solve the real problem of the inefficiency of public bureaucracy. There are many unprotected workers that need to be protected, but unions can’t defend them without a serious and critical evaluation of the state of public employment. Also, we need an intervention for the pensions contribution for people who have always worked with an atypical contract. This would ensure continuity in the cash flows and, therefore, the dignity of pensions. These kinds of reforms are costly and probably unpopular – aspects that make it difficult to believe in the effective possibility to obtain results soon.

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References

Chade, H., Eeckhout, J., & Smith, L. (2017). Sorting through search and matching models in economics. Journal of Economic Literature, 55(2), 493-544.

Daniele, V. (2015). Una stagnazione secolare? Italia, Giappone, Stati Uniti, 1950-2015 [Towards a secular stagnation? Italy, Japan, United States, 1950-2015] (No. 69997). University Library of Munich, Germany.

Franceschi, F., & Mariani, V. (2015). Flexible labor and innovation in the Italian industrial sector. Industrial and Corporate Change, 25(4), 633-648.

Gratton, G., Guiso, L., Michelacci, C., & Morelli, M. (2017). From Weber to Kafka: Political Instability and the Rise of an Inefficient Bureaucracy (No. 12081). CEPR Discussion Papers.

Perri, S, 2015, “Perchè il sud è meno efficiente”, Lavoce.info, http://www.lavoce.info/archives/37879/perche-il-sud-e-meno-efficiente/

Schneider, F., Raczkowski, K., & Mroz, B. (2015). Shadow economy and tax evasion in the EU. Journal of Money Laundering Control, 18(1), 34-51.

[1]    Source: Eurostat, public database, 2018.

[2]   Cuts in spending due to limit the amount of deficit/GDP ratio provided for in the Maastricht Treaty and subsequent treaties.

[3]    https://www.eurofound.europa.eu/observatories/eurwork/industrial-relations-dictionary/atypical-work

[4] https://www.ilfattoquotidiano.it/2014/06/07/rai-perche-deve-cambiare-confronto-con-la-bbc/1017281/

[5] Source: INPS, public database, 2018.

[6] Source: Ministry of Justice, 2018.