Combined and distributional effects of EPL reduction and hiring incentives: an assessment using the Italian “Jobs Act”

Abstract

After two decades of labour market reforms at the margin, the great recession created political scope to reduce the employment protection still benefitting the workers on open-ended contracts. To support employment levels, these policies have generally been combined with generous employment subsidies. While the theoretical and empirical literature on the two interventions taken in isolation appear generally abundant, almost nothing is known when they come combined. Analogously, no evidence is available on their distributional effects. This paper aims to fill these two gaps by means of counterfactual models estimated on high-frequency employer-employee-linked Italian data. Taking advantage of the quasi-experimental conditions created by the reforms enforced in Italy in 2015, we fit a (non-linear) difference-in-differences strategy into a competing risks duration model. We find prompt sensitivity of small firms to the incentives, while the large ones waited until they were combined with lower firing costs. Small firms substitute temporary for permanent employment, while larger ones do not seem inclined to forego fixed-term contracts, possibly for a probationary period. The reforms have benefitted domestic workers over foreigners, prime-age and older individuals over the young, and those with higher human capital. No gender effects emerge. Small firms operating in non-innovative sectors carry the bulk of heterogeneity effects. Finally, analysis on duration of newly activated open-ended contracts reveals a transitory effect, as separations jumped once the subsidies came to an end.