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The Italian Labor Market Reform: An Evaluation of the Jobs Act Using the Prometeia DSGE Model

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  • Michele Catalano

    (Prometeia Associazione per le Previsioni Econometriche)

  • Emilia Pezzolla

    (Prometeia Associazione per le Previsioni Econometriche)

Abstract

We evaluate the impact of Italian labor market reform included in the so-called Jobs Act using the Prometeia Dynamic Stochastic General Equilibrium (DSGE) model for the Italian economy. Following Krause and Lubik (J Monet Econ 54(3):706–727, 2007) and AlShehabi (J Macroecon 43:285–299, 2015), we introduce into the search and matching framework endogenous productivity-dependent firing costs which allow us to account for the innovations provided for by the reform. We simulate the introduction of the new contract with increasing protection, and analyze the role of different compensation schemes in dismissal. Moreover, we evaluate the effects of an increase in the functional flexibility, and strengthening the social security system. In general, we find a positive impact on GDP and aggregate demand. However, this positive effect comes at the expense of reductions in the labor income share and average wage, with a slight temporary decline in the unemployment rate that remains permanently higher in the long run.

Suggested Citation

  • Michele Catalano & Emilia Pezzolla, 2017. "The Italian Labor Market Reform: An Evaluation of the Jobs Act Using the Prometeia DSGE Model," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(2), pages 209-238, July.
    • Handle: RePEc:spr:italej:v:3:y:2017:i:2:d:10.1007_s40797-017-0057-z
    DOI: 10.1007/s40797-017-0057-z
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    References listed on IDEAS

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    1. Valeria Cirillo & Marta Fana & Dario Guarascio, 2017. "Labour market reforms in Italy: evaluating the effects of the Jobs Act," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(2), pages 211-232, August.
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    9. AlShehabi, Omar Hesham, 2015. "The importance of firing costs and the Hosios condition in search models with endogenous job destruction," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 285-299.
    10. Robert E. Hall, 1995. "Lost Jobs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 221-274.
    11. Antonella Trigari, 2006. "The Role of Search Frictions and Bargaining for Inflation Dynamics," Working Papers 304, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    12. Konstantinos Angelopoulos & Apostolis Philippopoulos & Vanghelis Vassilatos, 2006. "Rent-Seeking Competition from State Coffers: A Calibrated DSGE Model of the Euro Area," CESifo Working Paper Series 1644, CESifo.
    13. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    14. Ahrens, Steffen & Wesselbaum, Dennis, 2009. "On the introduction of firing costs," Kiel Working Papers 1559, Kiel Institute for the World Economy (IfW Kiel).
    15. Michele Catalano & Emilia Pezzolla, 2015. "The interaction between the labour tax wedge and structural reforms in Italy," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 185-223.
    16. Roberto M. Samaniego, 2006. "Employment Protection and High-Tech Aversion," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 224-241, April.
    17. Franco Peracchi & Eliana Viviano, 2004. "An Empirical Micro Matching Model with an Application to Italy and Spain," Temi di discussione (Economic working papers) 538, Bank of Italy, Economic Research and International Relations Area.
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    Cited by:

    1. Marco Guerrazzi & Ilham Ksebi, 2019. "Measuring Unemployment by Means of Official Data and Administrative Records: Empirical and Theoretical Perspectives," QUADERNI DI ECONOMIA DEL LAVORO, FrancoAngeli Editore, vol. 2019(110), pages 17-49.
    2. Elena Bastianelli & Daniele Vignoli, 2021. "Instability of Employment Careers and Union Dissolution. A Complex Micro-level Relation," Econometrics Working Papers Archive 2021_04, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
    3. Josué Diwambuena & Raquel Fonseca & Stefan Schubert, 2021. "Italian Labour Frictions and Wage Rigidities in an Estimated DSGE," BEMPS - Bozen Economics & Management Paper Series BEMPS88, Faculty of Economics and Management at the Free University of Bozen.
    4. Elena Bastianelli & Daniele Vignoli, 2022. "The Gendered Relationship Between (Old and New Forms of) Employment Instability and Union Dissolution," Population Research and Policy Review, Springer;Southern Demographic Association (SDA), vol. 41(3), pages 1021-1048, June.
    5. Luca Cattani & Giovanni Guidetti & Giulio Pedrini, 2021. "Work Flexibility and Workplace Training in Italy Before and After the Jobs Act Reform," Review of Economics and Institutions, Università di Perugia, vol. 12(1).
    6. Shobande Olatunji Abdul & Shodipe Oladimeji Tomiwa, 2019. "New Keynesian Liquidity Trap and Conventional Fiscal Stance: An Estimated DSGE Model," Economics and Business, Sciendo, vol. 33(1), pages 152-169, January.

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    More about this item

    Keywords

    DSGE model; Labor market; Search and matching; Italy; Jobs act;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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