Labor Market Imperfections and Reforms: Evidence From Italy

This paper investigates the impact of two major labor market reforms enacted in Italy during the 2010s, namely the 2012 Fornero reform and the 2015 Jobs Act, on labor market imperfections. Building on recent methodological advances in the estimation of markups and markdowns, we estimate firm-level measures of the labor wedge, defined as the ratio between the marginal revenue product of labor and its unit cost. Exploiting the institutional setup of the reforms, which affected firms above or below a 15-employee threshold differently, we adopt a difference-in-differences framework to assess whether the reduction in employment protection legislation altered the degree of labor market imperfections. The results show that the reforms favored firms over their employees, in line with a simple theoretical framework predicting an increase in the distance between labor compensation and productivity following a reduction in employment protection legislation. The effect is found to be stronger vis-à-vis white-collar workers compared to blue-collar workers. JEL Classification: D22, J31, J38, J42, L19.