Labor market reforms and allocative efficiency in Italy

This paper examines the extent to which labour market reforms of temporary contracts introduced in Italy at the beginning of the century influenced aggregate productivity via their e↵ects on the eciency of resource allocation. Using firm-level data from the Italian manufacturing sector, we measure resource misallocation by computing the covariance between firm size and productivity at the sectoral-regional level. We then implement a di↵erence-in-di↵erences approach to study the impact of the reforms, exploiting the cross-region and sector di↵erences in the timing of adoption. Our results suggest that the e↵ect on allocative eciency depends on the policy considered. While the reform of apprenticeship contracts made the reallocation of resources across heterogeneous firms more eciency enhancing, the deregulation of the use of fixed-term contracts did not have, on average, the intended results. The apprenticeship reform might have induced more productive firms, in particular, to invest in human capital by hiring workers to whom they provided job training, gaining market shares in so doing. In contrast, the uncertainty related to the newly lawful motives under which firms were allowed to temporarily hire workers might have reduced the incentive to use fixed-term contracts.