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Italy’s Jobs Act – Will it Create Jobs?

Heading in a better direction?

From January 1st, 2015, companies in Italy will be able to exploit the previsions of the nation’s Jobs Act employment law reform.

Boiling the details of the reform into a nutshell, what this means is that it will soon be easier and less costly for businesses in Italy to make employees redundant. It is hoped that this, in turn, will encourage companies to hire more people. Will it?

Prior to the introduction of the Jobs Act, which, remember, has not yet come into effect, it was very hard for businesses in Italy to downsize during periods of economic hardship. As a consequence, some businesses that could have survived the economic crisis by reducing staff numbers ended up shutting down completely. Soon, though, downsizing for businesses in Italy should be possible, though those staff who can be asked to leave, in my understanding, will only be those who have been taken on after January 1st, 2015. For businesses to be able to benefit from the new law, the employees who can potentially be made redundant will only be those who have been taken on under contracts of permanent employment – after January 1st 2015.

Will Italy’s Employers Welcome this Added Level of Flexibility?

While some of Italy’s employers might benefit from the Jobs Act, particularly those setting up new businesses, the reform will arrive far too late for those businesses which no longer exist. Had the legislation been introduced at least three years ago (perhaps thirty three years ago, even), many thousands of jobs in Italy could have been saved and more businesses could have weathered the crisis. Is the Jobs Act is a case of too little, too late? It does look like it. Still, it may mean that Italy will be better positioned to face future economic crises – small consolation for those who have lost their livelihoods and jobs during the current crisis.

There are still no real signs of economic recovery on the horizon in Italy so whether, as is hoped, businesses will actually begin taking on considerable numbers of employees in 2015 remains to be seen. Internal demand is still low, so it looks unlikely. Italy’s government, however, is confident that businesses will rush to exploit the benefits of its new employment law reform and that many thousands of jobs will be created from 2015 onwards. Others, though, do not share the government’s conviction and Italy’s – and Europe’s – economic situation suggests their caution might well be justified.

Then there’s economist Edward Hugh’s ‘perfect storm’ scenario:

The Jobs Act won’t save Italy from the effects of that storm – if it happens.

When Will the Effects of Jobs Act Effects Be Seen?

The effect of the Jobs Act, one way or another, should start to become visible by the end of the first quarter of 2015, and by the end of the second quarter, Italy should be able to understand whether or not the reform has begun to generate long term employment in Italy. What will also play a part in decisions taken by employers in Italy on whether or not to take on more people is the possibility of Italy establishing of a minimum wage.

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Seeing as the economic climate in Italy is still highly unstable, it may take until the end of 2015 before the effects of the Jobs Act can be evaluated. The end of 2015 is a long way away. As well as Italy’s huge national debt issue, external factors such as how the European Central Bank will tackle the Euro crisis and Germany’s reluctance to allow the ECB to act on the quantitative easing front, plus the Greece situation, will also influence the direction Italy’s economy will take. If demand continues to remain low, then businesses in Italy will not want to take on more employees whether it is easy to let them go or not.

Cost

At the end of the day, everything boils down to cost. As always, businesses in Italy will look at how much it will cost them to take on employees and they will go for the cheapest option.

There are three basic employment contract alternatives for businesses in Italy: VAT registered staff, short term contract employment, and permanent contracts of employment. Logically, the most cost effective contract of employment will be the solution which most businesses will opt for. In the past, this meant VAT registered staff and short term job contracts because these forms of employment relationship cost less and were easier to terminate. Another, unofficial though common employment relationship in Italy is that of illegal, unregulated, work.

What Italy’s government is hoping is that with the advent of the Jobs Act more businesses in Italy will start offering potential employees permanent contracts of employment instead of intrinsically unstable VAT registration based employment and temporary work contracts. To encourage this, businesses taking on more permanent staff in 2015 will be exempt from paying INPS pensions contributions for up to three years though these contributions are capped at €8,060 a year. However, businesses will do calculations and the results will determine which contract is likely to keep or increase profit margins.

Complicating matters is the fact that Italy’s businesses will still have to manage existing permanent contract employees having regard to previous complex and costly legislation. In other words, the previsions of the former employment law will still work to prevent businesses in Italy from downsizing (or sacking under-performing workers) and this means they may still opt for the nuclear option – closure which, of course, entails the loss of all jobs.

On the other hand, businesses in Italy which are considering expansion, perhaps to meet increased export demand, should be able be to do so more easily. The question remains whether they will offer new workers permanent contracts of employment or one of the alternatives. Cost will be the deciding factor.

One rather curious aspect of the Jobs Act is the very limited number of businesses in Italy which stand to benefit from this reform. 98% of businesses in Italy employ fewer than 15 employees and these very small businesses were never affected by legislative restrictions on downsizing and could dismiss staff relatively easily too. For these businesses the Jobs Act will make little, if any, difference though it might encourage some of them to expand.

The Union View

Italy’s unions are not at all happy with the Jobs Act which, they argue, risks rendering employment even less stable than it is now. In actual fact though, employment in Italy will become no less stable than it is in the United Kingdom but still more stable than it is in the United States which, as you may have noted, appears to be dragging itself out of the crisis.

Will the Jobs Act alone help kick start Italy’s economy? Probably not but one could be wrong. Let’s see what the situation is six months from now.

One is still erring towards the previously expressed view that Italy’s Jobs Act is largely a waste of time.

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