Reforms, labour market functioning and productivity dynamics: a sectoral analysis for Italy

Over the last two decades Italy registered notable improvements in the performance of the labour market both in terms of unemployment and participation. However, such improvements have been accompanied by a deterioration of productivity and competitiveness. This paper provides evidence in this respect evaluating to what extent labour market reforms might have influenced the poor productivity performance of the Italian economy over the period 1980-2008. Our results show that the increased flexibility in the use of temporary contracts has led to a lower productivity (level and to a lesser extent growth rate) in all sectors, with a higher impact on those sectors with a larger technological need for flexibility and a lower skill content. Moreover, the reforms had a negative impact on the productivity-enhancing reallocation by favoring a shift of employment towards low-productive industries. The negative effect of the reforms on the reallocative capacity is stronger in those industries with a higher flexibility need that are also the relatively lower productivity sectors in the period 1993-2008.