Courts' ineffciency and irregular workers:identifying the impact of real EPL

The employment protection legislation is not enforced uniformly both across and within countries. Among the others, the enforcement of regulation depends on the courts' actions and on the capacity of firms to escape legislation. We exploit the variation in courts' inefficiency across Italian judicial districts in order to provide evidence on the impact of EPL on job reallocation and firms' productivity. We show that the inefficiency of the judicial system has a causal effect on job fows by reducing both job creation and job destruction with a detrimental impact on firms' labour productivity. Moreover, we find that the negative impact of firing costs on job turnover and pro- ductivity is weaker in regions with a large share of irregular workers, since firms can partially adjust their labour force through the informal channel.