Italy's Labor Pains

Italy’s labor market, not its debt, may be the country’s biggest challenge

If you want to know which of Italy’s many problems is the most daunting, look no further than the first sentence of its constitution, written in 1947, which describes the country as “a democratic republic, founded on labor.” That foundation has begun to crumble. Italy’s economy can no longer afford the generous benefits it showered on its workers in the 1960s, when the country grew 5 percent to 6 percent a year. Measures put in place years ago to protect workers aren’t just slowing down the economy now, they’re perversely hurting the very workers they’re meant to protect.

How serious is the labor issue? Start with the country’s 2,700 pages of opaque and capricious labor laws. The laws are so unclear that many dismissals of workers end up in the country’s dysfunctional court system, where if a judge decides a worker was let go unfairly, he will likely rule that the employer has to reinstate him with back pay for the time he was gone. “When an investor asks about severance costs, all the other countries can provide an answer,” says Pietro Ichino, an Italian senator and professor of labor law at the University of Milan. “Italy can’t.” Duccio Astaldi, president of Condotte, one of Italy’s largest construction companies, says the difficulty of firing often prevents him from hiring when times are good. “It’s easier for me to get rid of my wife than to fire an employee,” he says.

Italian work contracts are negotiated nationally. Union leaders and employer federations set pay scales, benefits packages, and employment conditions for entire classes of workers—metal mechanics, textile laborers, construction workers, journalists, even maids and nannies. Workers—especially public employees—are guaranteed the same wage wherever they live. Never mind that living in Milan is 10 percent more expensive than Naples, according to Italy’s National Institute for Statistics. Negotiating labor contracts at the national level also removes nearly all incentives to compromise. A union based in a single factory or company may want to make sure its employer remains profitable. National negotiators have different motives: a craving for the media exposure that stormy wage talks generate, a goal of imposing their left-wing ideology on talks, or a plan to use their success in high-level negotiations as a steppingstone into the lucrative political establishment. “It’s in our DNA that negotiations mean conflict,” says Giorgi Elefante, an analyst at PricewaterhouseCoopers in Milan.

The result is crippling. The World Economic Forum ranks Italy 123rd out of 142 countries in the efficiency of its labor market. Employers are robbed of their ability to innovate, from experimenting with hours of operations to introducing new forms of wage structures. Meanwhile, national strikes roll around like federal holidays—one every month or so and almost always on a Monday or Friday to guarantee participants a three-day weekend. On average, Italian workers spend almost six times as many hours on strike as their German counterparts, according to the European Industrial Relations Observatory. In the past decade productivity has remained flat, even as its neighbors to the north have continued to work more efficiently.

Italy’s tangled legislation and contentious industrial relations are responsible for many absurdities. Some banks, including No. 1 bank Intesa Sanpaolo, have offered workers who take early retirement an opportunity to nominate a family member to replace them.

Companies and workers often try to get around these laws. Italian companies are famously tiny—some 95 percent of the country’s businesses employ fewer than 10 workers. One reason they stay so small is that at that size they are exempt from the more arduous provisions of national union contracts.

Another way for a worker or small entrepreneur to avoid becoming entangled in red tape is to opt out of the formal economy altogether. Anywhere from 15 percent to 27 percent of economic activity is underground, according to the Organization for Economic Cooperation and Development and the International Monetary Fund. In this world, receipts are unheard of, taxes unpaid, and union rules don’t apply. Meanwhile, big multinationals can invest in friendlier environments. The country attracts less foreign direct investment as a percentage of gross domestic product than any other country in Europe except for Greece, according to the U.N. Conference on Trade and Development.

Employers have battled for years with the unions for greater flexibility. The result is a three-tiered labor force, a setup Italians dub “apartheid.” Of 27 million workers, 15 million—most 40-plus—enjoy stable jobs with guaranteed privileges. An additional 8 million, mostly younger, form a growing army of freelancers and employees on continuously rolled-over short-term contracts. They receive none of the benefits that would in theory be granted under the generous labor laws. The remainder, 4 million or so, toil in the unprotected underground economy, according to Italy’s National Institute for Statistics.

Those in the top tier cling to their jobs knowing that if they quit they’re unlikely to find another. Unlike in the U.S., where constant churn means jobs are continuously being opened and filled, in Italy the labor market has seized up. Workers can’t move where they’re most productive. Potential entrepreneurs don’t dare drop out of their regular jobs to launch startups, for fear they would not land another good position should they fail. And woe to those who clash with their boss; the flip side of protection from being fired is that it’s very hard to change employers.

As long as Europe and the U.S. held a technological edge over the developing world, Italian companies could afford some inefficiencies. Globalization now means a worker in Warsaw or Shenzhen is just as likely to be sitting at a modern workstation as his counterpart in Detroit or Torino. If Italy wants its workers to be paid more than those in emerging markets, it can’t afford a frozen labor market. “Normally, countries change to grow, to get better,” says Giovanni Fiori, a professor of business administration at Rome’s LUISS University. “We have to change not to die.”

Newly appointed Prime Minister Mario Monti must reform a country where free-market ideas don’t have a political base. Labor laws are, along with pensions, the third rail of Italian politics—literally deadly. Pietro Ichino, the senator who has spoken out strongly for labor reform, has lived under police protection ever since two professors of industrial relations were assassinated by left-wing terrorists because they advised the government on how to cut through the tangled labor laws.

There is one way to build public support for change. Italy supports a class of workers who, though universally despised, are the most pampered in the country. Most of the year they enjoy a roughly two-day workweek, for which they receive an aftertax salary of $90,000 per annum, plus a $5,500 living allowance and a similar sum for expenses. They get free plane and train tickets, meals subsidized by taxpayers, free seats at premier soccer games, and a generous pension that kicks in after just five years of service. They’re the country’s politicians. Any reform of Italy’s workforce will have to start with them.


    The bottom line: With productivity flat and GDP growth near 1 percent, Italy must make hiring and firing its 15 million most protected workers easier.

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