Sunday, July 1, 2012

Italy May Be Ready to Learn an Important Aspect of Labor Economics – Laws That Unreasonable Protect Employees from Layoffs Result in Less Not More Jobs

Firms Don’t Want to Hire Workers They Cannot Terminate When the Jobs Are No Longer There

Like many European countries the labor movement in Italy has resulted in very strong, very stringent and very complicated laws governing termination of employment.  Essentially they make it almost impossible for a firm that is experience a reduction in demand for its products or services to terminate employees it no longer needs.

Part of this policy is to protect worker rights, but a large part of it is to force employers to retain employees that are no longer needed.  There are two awful results of this policy. The first is that a firm is stuck paying older, entrenched workers for services or production the firm cannot sell at a profit.  The second is that the policy results in massive unemployment for young people. 

Nadia Shira Cohen for The Wall Street Journal
Italian Labor Minister Elsa Fornero says
 'we're trying to protect individuals, 
not jobs' under the new law.
Because of the dire economic conditions of Europe in general, and Italy and Spain and other countries in particular, countries like Italy are moving to reform their labor markets.

One of the key tenets of the new law is that employers will be able to lay off individual workers for economic reasons. Until now, companies have had to jump through long and expensive hoops to lay off employees in order to downsize during slumps—a practice many economists say is the key reason for Italy's low level of foreign direct investment and stagnant productivity.

The idea that a company can lay off workers for economic reasons seem basic, but that was not the situation in Italy.  Now it will be.

To offset the economic consequences to workers Italy is improving its unemployment benefits.

At the same time, the new law brings Italy closer in line with most advanced economies in offering a universal jobless-benefit program. Currently, this is available only to workers with lifetime contracts, and not to millions of others, especially younger Italians working on fixed-term, often low-salary, contracts.

The trade-off of looser employment protection compensated by broader welfare provisions replaces an entrenched and litigious system that has left Italy with the euro zone's second-lowest employment rate, after Malta.

Protecting employees and granting employee rights is a good thing.  But too much of a good thing is a bad thing.  In the U. S. the nation is still moving towards giving employees, particularly women and minorities the protections they need.  In Europe the movement is towards giving employers the flexibility to adjust their work forces to changing economic conditions.  Those in Italy who are fighting this trend are going to be amazed at how much a good reform of the labor market will do for the Italian economy.

In fact, a little more labor reform and a lot less austerity and the horrible disaster that is the European economy may turn into just a normal disaster.  A normal disaster, yep, that would be an improvement.

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