In recent years, the labor market in Italy has been looking good, and will possibly improve in time to come.
Following significant labor market reforms in the 1990s and early 2000s, labor market outcomes have improved substantially in Italy: employment and labor force participation rates have increased, and the unemployment rate dropped to around 6 percent in 2007, down from a peak of over 12 percent in the mid-1990s. But despite these improvements, employment rates in Italy continue to be substantially lower than those in most other European countries. Asymmetries in labor market polices have also exacerbated inequities in the labor market. For example, Italy’s social safety net is generous for some worker groups, but virtually nonexistent for (most) others; the extent of employment protection varies substantially across worker groups; and the aggregate wage distribution is too compressed. As a consequence, a rising share of workers faces high employment risk but little income insurance. The existing wage bargaining system exacerbates these disparities: nationally bargained wages are less binding in the North, but too high for the South, and the lack of a broad social safety net, particularly for those in the South, prevents sufficient spatial mobility to more quickly reduce regional disparities.
Starting in the mid-1990s, both labor force participation and employment increased substantially in Italy. With cumulative employment growth almost twice that of the labor force, the unemployment rate declined sharply, to 6.1 in 2007, about half its peak rate in 1995. Reform efforts, such as the 1997 Treu measures and the 2003 Biagi reforms, contributed to the growth in aggregate employment, but their focus on reform “at the margin” also led to an increasing dualism of the labor market. Most of the employment gains since 1995 were in temporary and part-time employment. Between 1995 and 2007, the share of temporary employment increased from 7.2 percent to 12.4 percent, and the share of part-time employment from 10.5 percent to over 15 percent. In absolute terms, the number of workers in temporary work arrangements more than doubled during that time, while permanent employment increased by only 7 percent. While less dramatic, a similar gap was observed for part-time employment, which increased by 65 percent during the time period, compared to 9 percent cumulative growth in full-time employment. The jump in part-time employment in 2004 may also have benefited the share of women in employment, which increased by over one percentage point that year.
Recent positive developments notwithstanding, important weaknesses remain in the Italian labor market. Employment growth is starting to exhibit signs of a slowdown, and the level of employment, as a share of the working-age population, is still substantially below that in most other European countries. With hours worked at about the EU average, total labor utilization is comparatively low in Italy. And while the increased use in temporary and parttime employment, also now roughly at the EU average, has provided increased flexibility, it may also have displaced growth in permanent employment and contributed to stalling productivity growth. In spite of recent employment growth, unemployed workers still take a long time to find work—nearly 50 percent of the unemployed have been out of work for more than one year, substantially above the EU average.
Lastly, although earnings growth has been substantial, it was not excessive by cross-country comparison: over the past decade manufacturing earnings grew at an average annual rate of 2.6 percent in Italy, below the average rate of over 3.2 percent in other EU15 countries. Other labor costs also appear not to have played a large role: at 33.7 percent, the tax wedge in Italy, i.e., the combined tax burden of employer and employee deductions relative to total labor cost, falls below the EU average of 34.2 percent. Earnings growth did, however, outpace growth in labor productivity over the past two decades, which stagnated in 2000 and slightly decreased since then. As a result, Italy’s unit labor costs grew by nearly 28 percent cumulatively during 1995-2007, compared to a European average of just over 20 percent during the same time period. Thus, the secular deterioration in relative unit labor costs is predominantly a problem of low productivity rather than high earnings growth.
It is important to differentiate the reasons for the change in figures, and understand why statistics became this way for employment in Italy.
Source: Imf
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