Employment protection legislation and household formation: evidence from Italy

Abstract

While many studies have investigated the determinants of household formation and fertility in young adults, only a few have focused on the impact of employment protection legislation (EPL) on these outcomes. Moreover, to the best of our knowledge, no one has investigated how changes in EPL may alter the intentions of young individuals even before their realization. In this paper, we study the differential impact of the reduction in EPL associated with Italy’s 2015 Jobs Act on the household formation and fertility intentions of young Italians in various districts. We use data from a survey conducted on a sample of young people between the ages of 18-34 for the years 2012, 2015, 2016, and 2017. The identification strategy exploits local variation in the level of efficiency of the courts, measured in terms of the average duration of proceedings, to assess the existence of within-country and across-district heterogeneity in the reform’s impact. Indeed, firing costs used to be relatively greater in districts characterized by a longer duration of labor trials. The Jobs Act, by reducing firing costs and modifying the autonomy of judges, should have had a larger impact in districts with less efficient courts. According to our results, the reform seems to have indirectly leveled out the fertility and household formation intentions of young Italians living in districts with more and less efficient courts. Heterogeneities indicate that the results are mainly driven by older individuals and graduates who live in less disadvantaged areas.