Crossing the threshold: employment regulation, firm behaviour, and labour market flexibility in Italy

This paper examines how employment protection legislation and firing costs affect firm size growth and workforce composition in Italy (as a ratio of temporary to permanent employment), with a particular focus on recent labour market reforms. The analysis is based on administrative firm-level data from the Italian private sector, with a specific focus on firm outcomes above the 15-employee threshold, where stricter employment regulations apply. Using a linear probability model, we find that firms near this threshold are less likely to grow in terms of employee numbers. Furthermore, the discontinuity in employment protection influences the composition of the workforce, leading to a higher incidence of temporary contracts above the threshold. We apply a difference-in-discontinuities approach to examine the heterogeneity in the threshold effect during a period of labour market reforms. Our results suggest that recent reforms have had negligible effects on the discontinuity in firms' employment growth. As for the use of flexible contracts, we observe a mitigation of the threshold effect after the regulatory changes.