Working Paper Summaries 94/30: Labor Market Institutions and Flexibility in Italy: A Critical Evaluation and Some International Comparisons

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

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.

Working Paper Summaries (WP/94/1 - WP/94/76)
Author: International Monetary Fund