Abstract
A recent reform in the Italian labour market has modified the permanent contract by reducing firing costs. Using a discontinuity in the application of the reform, we evaluate its effect on the probability of being still employed about three and a half years later. In contrast with theoretical predictions, we find that the job survival probability is not smaller for the treated and even significantly larger in some cases. We investigate the composition of permanent workers hired after the reform and we find evidence of treated firms changing their recruitment strategy in favour of potentially more productive workers.
Highlights
The Italian labour market has been traditionally characterised by a strong protection against dismissal of permanent workers
In contrast with the theoretical prediction, we find that being hired with lower firing costs does not reduce the probability of being employed with the same job 1333 days after the contract started, with respect to being hired with a stricter employment protection legislation
According to the results in column (4), workers hired in firms with 15 employees or more have, on average, a probability of still being employed 1333 days later that is 3.3 percentage points higher than those hired with a stricter employment protection legislation
Summary
The Italian labour market has been traditionally characterised by a strong protection against dismissal of permanent workers. The employment protection legislation has generated a harsh and continuous debate between unions, entrepreneurs and governments. The focal point of the debate is Article 18 of the Workers Statute, which compelled the employer, in firms with 15 employees or more, to reinstate the worker or to a compensation of 15 months pay following an unfair dismissal certified by a court ruling. Staffolani alternatively to a lower severance payment for firms with less than 15 employees, while firms with 15 employees or more had to reinstate the worker in case of certified unfair dismissal. In 2013 the OECD still accounted Italy as one of the countries with highest degree of protection of permanent workers against individual and collective dismissals (OECD 2013)
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