On-the-job-training contracts in Italy: Training or flexibility device?

The 1997 “Treu Act” reformed the Italian labor market “at the margin”. This paper studies the act's effects on the flows out from on-the-job-training contracts (including both “Contratti di Formazione Lavoro” and Apprenticeship Contracts) into a new labor market status after one year. Applying a multinomial logit model and Fairlie decomposition, our findings suggest that the Treu Reform has shifted firms’ hiring preferences by changing the returns of workers’ characteristics. Moreover, with some differences between “Contratti di Formazione Lavoro” and Apprenticeship Contracts, the Treu Reform involved a substitution between transitions into a permanent job and into a new on-the-job-training contract. Interestingly, following the introduction of the Treu Reform, workers need to accumulate more experience in Apprenticeship Contracts to achieve the same probability of future employment, which suggests that Italian firms value the flexibility characteristics of on-the-job-training contracts more than their training content. The underlying lesson we can draw is that in labor markets with a weak demand of skilled workers, policies aimed at promoting stable employment and avoiding precarious careers should consider the effectiveness of on-the-job training and monetary incentive levels.