Super Mario talks a good game but Italy’s entrepreneurs have lost out

Matthew Melchiorre is Warren T. Brookes journalism fellow at the Competitive Enterprise Institute.

ITALIAN Prime Minister Mario Monti recently proclaimed “historic” labour reform and even declared the “financial aspect” of the crisis to be over. But don’t pop the Prosecco yet. Italy’s biggest impediments to business – rigid labour rules and uncertain contract enforcement – are alive and well.

Monti’s upbeat attitude should be tempered by Italy’s ongoing economic stagnation. Total production in Italy still hasn’t recovered to its 2007 peak, while the unemployment rate – 9.3 per cent in February – continues to rise. On ease of doing business, the World Bank ranks Italy at 30 out of the 31 OECD high-income countries. It is only beaten to worst place by Greece.

This spring’s labour reform battle was a lost opportunity at turning that situation around. The government and party leaders came to a fragile agreement with Italy’s largest unions. Businesses would be allowed to lay off workers for “economic reasons,” meaning financial distress, while paying up to an exorbitant 24 months of severance. But firms still would not be allowed to fire employees for incompetence.

The centerpiece of Italy’s rigid labour market, and the main issue of contention, is Article 18 of the Worker’s Statute. Under it, “poor performance” is not grounds for employee dismissal. Only “concrete and wanton negligence” justifies that. If a labour court finds a business guilty of firing an incompetent employee, the firm must rehire the worker and compensate for lost pay. If an entrepreneur has fewer than 15 employees, he faces a choice between rehiring or paying up to 14 months of severance. Article 18 protects 87 per cent of private sector workers, according to numbers from Datagiovani – a statistical agency that studies Italian youth.

Then there’s Italy’s two-tier labour market, an unintended consequence of Article 18. The law shields older workers, who already have regular contracts, from the competition of new job seekers: the young. Because they are shut out from regular employment, 17 per cent of employed Italians under 35, more than any other age group, work on short-term contracts exempt from protection. The rest not on protected contracts remain unemployed. Italy’s youth unemployment averaged 5.8 percent above the EU average from 2001 to 2010.

Recent reform makes it even less attractive to hire the young because social and retirement contributions for short-term contracts would increase. Young qualified Italians just cannot find jobs, because businesses won’t take the risk of hiring an employee for life.

Entrepreneurs are afraid to grow. Within the EU, Italy boasts the highest proportion of employment in both micro-firms – businesses with fewer than 10 employees – and micro and small firms combined. It also faces the lowest proportion of employment in medium-sized enterprises.

Compounding the problem of an inflexible labour market is a slow legal system not known for its impartiality. On average, it takes almost 3.5 years to adjudicate a lawsuit, according to the World Bank. Italy ranks dead last among OECD countries in efficiency of contract enforcement.

Making matters worse, entrepreneurs don’t find much sympathy in Italian courts. Economist Andrea Ichino of the Center for European Policy Research found that every percentage point increase in regional unemployment correlates with a 2.5 per cent reduction in an employer’s chance of winning employee dismissal cases in that region.

Fiat, Italy’s iconic car manufacturer, has already moved production to Poland and is threatening to shift more to Eastern Europe and North America. While allaying fears recently that Fiat would leave Italy entirely, chief executive Sergio Marchionne didn’t hesitate to criticise Italy’s impossible regulatory environment: “The rules that were thought to defend jobs have brought us to a situation in which the hardest thing is to create jobs.”

Rigid labour markets and a broken court system make doing business in Italy a gruelling ordeal. Recent reforms merely placate intransigent unions and cowardly party leaders. Super Mario should not be surprised when financial chaos returns as markets lose confidence in Italian prosperity once again.

Matthew Melchiorre is an adjunct analyst at the Competitive Enterprise Institute. He lives in Bologna, Italy.

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