The Italian Labor Market Reform: An Evaluation of the Jobs Act Using the Prometeia DSGE Model

Michele Catalano and Emilia Pezzolla
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Emilia Pezzolla: Prometeia Associazione per le Previsioni Econometriche

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2017, vol. 3, issue 2, No 4, 209-238

Abstract: Abstract We evaluate the impact of Italian labor market reform included in the so-called Jobs Act using the Prometeia Dynamic Stochastic General Equilibrium (DSGE) model for the Italian economy. Following Krause and Lubik (J Monet Econ 54(3):706–727, 2007) and AlShehabi (J Macroecon 43:285–299, 2015), we introduce into the search and matching framework endogenous productivity-dependent firing costs which allow us to account for the innovations provided for by the reform. We simulate the introduction of the new contract with increasing protection, and analyze the role of different compensation schemes in dismissal. Moreover, we evaluate the effects of an increase in the functional flexibility, and strengthening the social security system. In general, we find a positive impact on GDP and aggregate demand. However, this positive effect comes at the expense of reductions in the labor income share and average wage, with a slight temporary decline in the unemployment rate that remains permanently higher in the long run.

Keywords: DSGE model; Labor market; Search and matching; Italy; Jobs act (search for similar items in EconPapers)
JEL-codes: E24 J30 J41 J64 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s40797-017-0057-z

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