The Effects of Employment Protection on the Italian Labour Market

Abstract

This paper uses the Italian Social Security employer-employee panel to study the effect of a reform that introduced a cost for unjust dismissals only for firms below 15 employees, while leaving firing costs unchanged for bigger firms. We find that the increase in dismissal costs decreased accessions and separations in small relative to big firms, the more so in sectors with higher employment volatility. Moreover, the reform reduced firms’ entry rates while increasing the exit rate. We also find evidence that higher EPL flattened employment policies over the cycleCosts of Unjust Dismissals, European Unemployment, Firms’ Entry and Exit, Employment Volatility