Labour Courts and Firing Costs: The Labour Market Effects of Trial Delays

Employment protection is the result of labour laws as well as of institutional factors which are not encompassed in official legislation. Courts' delays in settling labour disputes are among those factors. Using individual data from the Italian Labour Force Survey for the period 2008-2010 and exploiting the territorial heterogeneity in the duration of labour trials across Italian regions, we investigate the effect of dismissal costs on the composition of employment. We find that labour courts' delays reduce the employment rate and increase inactivity of specific categories of workers, i.e. women, young and low skilled individuals. Furthermore, lengthy trials reduce the likelihood of accessing a permanent occupation and increase the incidence of long term unemployment for the same groups of workers. These results also imply that trials length and, more generally, courts activity have an impact on labour market outcomes which goes in the same direction as explicitly written rules.