Italy’s lengthy economic crisis has caused unemployment to rise noticeably in past years. Rigid labour market regulation has additionally decelerated the development of employment. Both factors prompted the Italian government to act and overhaul the labour market. Due to the rigid regulation of the Italian labour market, employees had become divided into two groups – those with permanent jobs that were virtually impossible to terminate and those with limited working contracts. The reform was adopted at the end of 2014 and implemented in stages in the first half of 2015.
Essentially the labour market reform, dubbed the „Jobs Act“, focused on loosening up the previously very strong protection against dismissal rules. A new working contract model was created that was intended to act as a bridge between temporary and permanent employment. In addition to creating more flexibility, the workforce was also to be offered greater social security.
The reform has indeed injected movement into the labour market. The unemployment rate has fallen somewhat and employment has gained noticeably. However, employment growth also appears to have benefited from accompanying measures such as temporary exemption from taxes and social insurance contributions. It remains to be seen whether the job expansion will continue once these subsidies expire. A critical point to note regarding the partial successes achieved so far is that civil servants were not covered by these statutory amendments. Furthermore, the protection against dismissal regulations continue to apply for job contracts dating back to the period before the reform. This means that, for these existing jobs, nothing has changed.
But a pre-condition for preventing the slow process of employment growth from grinding to a halt is that the Italian economy continues to recover. We expect gross domestic product to record relatively weak but positive growth of +0.8 percentage points both this year and next. Subdued economic growth of this kind will also most likely be accompanied by weak employment expansion. In 2017, the unemployment rate is still likely to average out at an annual 10.8 percent. As experience with the German labour market reform shows, the sustainable positive stimulus is only likely to really feed through in the medium term.