Firing costs and firm hiring: evidence from an Italian reform

Abstract

Aimed at reducing labour market dualism and favouring job creation, in 2015 the Italian government issued new regulations lowering firing costs for newly signed open-ended job contracts. To foster the adoption of the new rules the government introduced also a generous subsidy for firms hiring workers with an open-ended contract. Using microdata on hiring and firing for one Italian region, Veneto, we exploit some differences in the design of the two policies to separately identify the effects of new firing costs on firm hiring. We find that around 8% of gross permanent hires occurred because of the reduction of firing costs (in addition to the positive and large effect of the hiring subsidies). The reform of firing costs contributed also to increase the monthly rate of conversion of fixed-term jobs into permanent positions. As suggested by the theory, we also find that the new firing rules made firms slightly less reluctant to offer permanent job positions to yet untested workers.