Wednesday, April 04, 2012

Italy's Reforms: Monti Fires The Starting Gun

Italy's unelected government has entered one of the most delicate stages of its tenure. Mario Monti and Italian Welfare Minister Elsa Fornero (in the picture) have just presented their key proposals for reforming Italy's labour market.

The full text of the draft bill is available here (in Italian). If adopted, the proposed measures would introduce substantial - and desperately needed - reforms to Italy's labour market.

In particular:
  • The so-called 'social shock-absorbers' (i.e. unemployment benefits) will be extended to all categories of workers, but will be available for shorter periods to avoid people excessively relying on help from the government instead of seeking another job;
  • Apprenticeship will be encouraged as opposed to the current system where too much emphasis is put on academic degrees;
  • A proposal to change the peculiar way 'unfair dismissals' are dealt with under Italian law (which we looked at here - basically, anything can count as 'unfair dismissal' which makes it very difficult for employers to hire and fire). But this reform actually seems to have been watered down at the hands of Italy's centre-left Democratic Party, which has close links with trade unions.

In addition, Monti also wants to make it more expensive to re-employ temporary workers, by forcing employers to either put temps on a permanent contract or let them go, after a certain period of time. This is a tricky one. Long-term employment should of course be encouraged and the incentives proposed for employers who hire people permanently could help. But would it also not reduce the flexibility of the labour market? And would it actually provide an incentive for firms not to hire permanent workers (instead employing different temporary staff)?

Within Italian context, these are substantial reforms that should not be under-estimated. But they remain somewhat patchy and could be further watered down by the Italian parliament. Being a technocrat doesn't make Monti immune to political pressure - but these reforms, whilst welcome, are only the starting point in the long race to drag Italy out of its current malaise.


carbon credit investments said...

Whilst Monti's reforms may not be perfect, they are far better than anything Italy has ever tried before. Can you imagine someone like Berlusconi doing something like this? Yes, Mr. Monti will no doubt feel some political pressure given his position, but this is a great start.

Rik said...

1. The problem is imho things also in Italy (but basically in all PIIGS) simply go too slow.
To get a sustainable situation countries like Italy should reduce costs with say 30%. This is just 1 or 2 % a year stuff. It takes too long this way.
2. PIIGS (exc Ireland) have come in the bracket of countries that compete with the China's of this world. For a too large part of the economy at least. Plus these countries (or parts thereof move forward with HI-Speed as well).
3. They have to pick up and move faster if they want to keep even remotely their standard of living. Starting again is most likely first possible after this crisis has been solved. But we are nowhere near that pont and the competition is not consolidating but moving ahead.
4. Making it more difficult to rehire temporary workers will not work. In European countries labor is seen on a worldwide basis extremely expensive. So it is a 'partystopper' if employers are obliged to pay for workers while there is no production attached to them.
5. Re this Holland is a good example. If I am not mistaken only 3-4 000 permanent employed people were hired last year, next to 10,000s temporary jobs. But the labormarket overthere looks to function reasonably.
6. There are basically in the basis of a country's economy 2 kind of jobs: Apple-jobs and Foxcom-jobs. Apple-jobs are paid 100 000 USD a year, Foxcom 2-5 000 USD. A too large portion of the Southern PIIGS is in Foxcom jobs (or effectively competing (worldwide usually) for those jobs).
In Europe countries like Italy cannot even compete with Eastern Europe for these kind of jobs they are more than double as expensive (and 5 to 10 times than China and India).
So they have to compete with the Apple world. Or at least a big part of their economy. Italy has clearly a basis (unlike the rest of the Southern PIIGS), but the companies are nowhere near ready to compete massively on the worldmarket. For Italy this needs to be adressed and quickly.
7. The private sector is the only one with growthpotential providing they can make the step to the worldmarkets. As we have seen simple production is way too expensive. Service sector (tourism mainly externally) there are 20 countries along the Med competing. Other services they simply miss languageskills and skills in general, so it is the local variety of flipping burgers, baking pizza's. Government has run out of money and borrowingcapacity. And people donot have much money with high unemployment and decreasing wages.
8. However what we see is that a lot of the successful Italian cies like FIAT are moving abroad, mainly because of the laborcosts and the unreliability of production in Italy (for all sorts of reasons).
9. In a nutshell this is nowhere near enough to make the country competitive again. It takes much too long the competition is moving forward with Hi-Speed. And making rehiring temps more difficult is simply counterproductive.