Preliminary signs that the Italian labour reform is already at play

The latest encouraging set of labour market data shows the reform approved by the government at the beginning of March has already started to produce positive effects.The reform has already helped reduce labour market duality, while the effect on total unemployment is not clear cut. Between February and May, the unemployment rate was unchanged at (12.4%), but job activation data show that open-ended labour contract positions have increased significantly since then compared with the same period last year, while the number of fixed-term contract activations has eased. Job activations rose to 780k in May from 738k in May last year. 

The data show a sharp increase in permanent job positions, which helped rebalance the uneven Italian labour market, historically overloaded by fixed-term contracts. Job activations were split as follows: 20k apprenticeship contracts (-19% y/y), 154k open-ended positions (+42%) and 607k fixed-term jobs, almost unchanged versus last year. Indeed, the share of open-ended jobs as a percentage of the total rose to 20% from 15%, while the share of fixed-term jobs edged down from 82% to 78%. On the back of fiscal incentives to hire under 'single' contracts (up EUR24k over three years), fixed-term labour contract conversion into open-ended contracts amounted to 30k in April, 50% higher than last year.

All in all, The introduction of a 'single' open-ended labour contract represents major step and will continue to help Italy re-balance the proportion of workers on temporary contracts in the overall workforce and improve its labour productivity. However, the effect on total unemployment is not clear as firms may just shift short-term contracts into permanent ones for tax reasons. 

"We believe the government should extend fiscal incentives to hire under 'single' contracts beyond 2015; the cost should not be too prohibitive (up to EUR5.0bn per year), but the potential associated upsides could be sizeable," says Barclays.