Deregulating Job Protection: Evidence on Productivity and Income Distribution from Italy

Gabriele Ciminelli and Guido Franco
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Gabriele Ciminelli: Asian Development Bank
Guido Franco: Centro Studi Confindustria

No 809, ADB Economics Working Paper Series from Asian Development Bank

Abstract: This paper investigates the impact of job protection deregulation on firms’ productivity, leveraging a size-based cutoff in the eligibility criteria of a pivotal 2014 labor market reform in Italy. The reform replaced reinstatement requirements with a progressive compensation system for unjust dismissals of new hires in firms with more than 15 employees, while leaving smaller firms unaffected. We find that total factor productivity increased by 1% in treated firms relative to control firms, on average, in each of the 5 years following the reform’s implementation. Labor productivity gains were slightly larger, also driven by capital deepening. Next, we extend the analysis to uncover how the productivity gains were distributed between employers and workers. Capital owners benefited more, as the reform led to a gradual decline in the labor share of value added, reaching 0.7 percentage points after 5 years.

Keywords: employment protection legislation; job protection deregulation; total factor productivity; capital deepening; income distribution; labor share of income (search for similar items in EconPapers)
JEL-codes: D22 D24 J08 J41 O43 (search for similar items in EconPapers)
Pages: 42
Date: 2025-10-13
New Economics Papers: this item is included in nep-eur and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:ris:adbewp:021674

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