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Institutional rigidities and employment rigidity in the Italian large industrial firms

  • RUSSO, Giuseppe
  • VEREDAS, David

Many indicators (OECD 1994) show that the Italian labour market is characterised by a strong pro-workers and pro-unions legislation. This is usually interpreted as a high degree of rigidity. It is known that, in response to shocks, firms in rigid labour markets tend to trade workers adjustment off individual working hours adjustment (Abraham-Houseman (1994)). We analyse this trade-off for the Italian large industrial firms, using the Kalman filter to get the impulse-response functions of employment and working hours to permanent and temporary shocks. We find that in the first 80s the terms of the trade off have changed, and employment has become more responsive to shocks. Firms seem thus to have circumvented the regulation: after the pro-workers "institutional push" of the '70s, a process of capital/labour substitution has allowed them to re-form their profit margins and to minimise the labour input. Institutions have tried t o incentivate new hirings reducing the bias in favour of workers. Consequently, a deregulation process started in 1983-84 is changing the Italian labour market. Nonetheless, deregulation per se is unlikely to cause new hirings in an environment where the labour input has been minimised.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000048.

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Date of creation: 00 Oct 2000
Date of revision:
Handle: RePEc:cor:louvco:2000048
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