A tale of comprehensive labor market reforms: Evidence from the Italian jobs act

The Italian Jobs Act introduced a subsidy for new hirings as well as a new open ended labor contract based on graded security, with severance payments increasing with tenure, while phasing out the compulsory reinstatement of workers in the case of unfair dismissals applied until March 2015. Simple models of job creation and destruction predict that hiring subsidies and lower firing costs unambiguously increase hirings. Moreover, lower firing costs associated with graded security should also increase layoffs. These effects need not to be uniform across the size distribution of firms, especially when firms of different size are treated differently by the policy changes as in the case of the Jobs Act. On the one hand, the hiring subsidy was proportional to wages, but had a cap, hence was more generous for small firms- typically paying lower wages than large firms making them particularly responsive along the job creation margin. On the other hand, the reduction in firing costs applied mainly to large firms concentrating on them the adjustment along the job destruction margin. To investigate empirically the effects of the Italian Jobs Act, we draw on a unique dataset covering the universe of private firms in Italy having at least once 10-20 employees in the two years prior to the reform of January 2015. We find evidence of a substantial increase in open ended hirings, and in the transformation of fixed-term into open ended contracts, in the aftermath of the Jobs Act. The effects of the Jobs Act on firings- conversely- are much smaller, and are concentrated on large firms, while small firms react more intensively- creating new open ended contracts- to the hiring subsidy.