Job protection deregulation, productivity and the distribution of income in Italy

This paper investigates the causal impact of job protection deregulation on firms’ productivity, leveraging a size-based discontinuity in the eligibility criteria of a pivotal 2014 labour market reform in Italy. The reform replaced reinstatement requirements with a progressive compensation system for unjust dismissals of new hires in firms with more than 15 employees, while leaving smaller firms unaffected. We find that the reform increased total factor productivity by 1% in treated firms relative to control firms, on average, in each of the five years following its implementation. Labour productivity gains were slightly larger, also driven by capital deepening. Next, we extend the analysis to uncover how the productivity gains were distributed between employers and workers. Capital owners benefited more, as the reform led to a gradual decline in the labour share of value added, reaching 0.7 percentage points after five years.