Labor market reforms and allocative efficiency in Italy

This paper examines the extent to which labor market reforms of temporary contracts introduced in Italy at the beginning of the century influenced aggregate productivity via their effects on allocative efficiency. Using firm-level data from the Italian manufacturing sector, we compute the extent of resource allocation by the covariance between firm size and productivity, and we identify the impact of the reforms by exploiting the variation in their implementation across sectors and regions. Our results suggest that the reform of apprenticeship contracts has increased the size-productivity covariance, and this aggregate effect can be rationalized through a theoretical model where the apprenticeship contract reform allows highly productive firms to gain market shares by improving their training efficiency, and by inducing them to turn a higher fraction of apprentices into permanent workforce. By contrast, the deregulation of the use of fixed-term contracts shows heterogeneous effects, with negative results among regions with long labor court disputes, and positive ones among those with less lengthy settlement procedures. The legal uncertainty associated with the reform might have reduced the incentive to use fixed-term contracts for productive firms located in regions where judicial disputes take longer to be settled.