Greasing the wheels of entry
and exit in the Italian labour
market
Tito Boeri
Milan, October 16, 2015
UniCredit&Universities
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Issue
• Italy needs to adjust its product specialization and industrial
structure
• Such a major restructuring requires adjustment along labour
market entry/exit margins, not simply reallocation of incumbent
workers
• Frictions at the entry and exit margin. Long-term unemployment
among youngsters. Forced increase in retirement age. Hiring
freeze in the public sector
• Not only problem of level of turnover. Largely issue of quality.
Segregation at entry, bad selection at exit.
• Complementarities between young and adults are not exploited
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Quantity and quality
% hires of employees with
permanent contracts
Young out old in?
under 30
all ages
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Productivity Potential
Complementarities in training
0.2
0.1
0.0
-0.1
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ManagementComunication
NumericalAnalytical
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-19 20-24 25-34 35-44 45-54 55-65
Age
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The Economics of Graded Security
• (Boeri Garibaldi Moen, 2014. Inside Severance Payments)
• Wages are deferred to provide incentives to invest in job
specific training.
• Firms commit on increasing wages, but not on employment
• Firms ex-post have incentives to dismiss also investing workers
• Severance is a commitment not to fire investing workers
• Should be increasing with tenure under general conditions
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The problem with deferred wages
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Flat Severance: The Italian Anomaly
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Optimal Severance Increasing with tenure
in theory….
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… and practice:
The Graded Security Contract
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Why forced increase in retirement age is costly
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We can rely on retirement incentives!
• Generous pension systems operate like increase in the
reservation wage at older age
• No need to impose mandatory retirement
• High heterogeneity in preferences over labour and
leisure at old age, highly correlated with productivity
• Flexibility in retirement unfolds young-old
complementarities. But should be sustainable
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NDC Pension Benefit Calculation
Why flexibility under the NDC system
is sustainable
n
n +1
1
p = τ ∑ wi ∏ (1 + g )
γ
i =1
j = i +1
w
j
m
γ = ∑ (1 + δ )1−i
Transformation coefficients
i =1
ITALY:
SWEDEN:
d = 1.5%
δ = 1.6%
Pt +1 = Pt (1 + π t )(1 + g t − δ )
Retirement incentives before and after NDC
Tito Boeri
-- Entry
Boeri and vanOurs, The Economics
of Imperfect
Labor Markets, PUP, 2013
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Summarizing
• Removing frictions at entry and exit is good for welfare and growth
• Under bad times these frictions create a trade-off between young and
old workers and hinder job reallocation
• There are ways to make young and older workers complementary in
increasing productivity
• Contratto a tutele crescenti to increase investment in human capital
on-the-job. Effects on productivity more than on number of new jobs
• Uscita flessibile allowed by NDC systems allows for self-selection of
older workers. Let them all choose.
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