Flexibility, Job Creation and Globalization: The Case of Italy

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Flexibility, Job Creation and Globalization The
Case of Italy

• James J. Heckman
• University of Chicago
• December 2002

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Problem High Level of Unemployment

• Rising Over Past 30 Years
• Structural
• Weak Incentives To Invest in Human and Physical
  Capital
• Impaired Ability to Respond to Changes and
  Opportunities Due to Bureaucratization and
  Regulation

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Main Points

• High Welfare Cost of Taxes, Regulation, Unionism
• 40-100 of each Euro
• Security and Insurance Come at a Price
• High Level of Distortions Cannot Explain Growing
  Unemployment and Sluggishness
• More variability and opportunities
• System impairs Italys ability to respond

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• Open Markets Imply Uniformity of Prices,
  Equalization of the Returns to Capital
• Rising worker mandates paid in lower wages
• New Economy Diverse Opportunities and Much
  Change
• Many New Opportunities
• Need to Respond and Adapt to Local Conditions
• British Unionism vs Italian Unionism

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Some Facts1. OECD employment high and rising
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2) Unemployment Long-Term
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3) Concentrated Among Youth
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4) Structural, Not Keynesian Not a Phillips
Curve Phenomenon
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5) Recent Decline Due to Recent Reforms
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• Italy has Lower Cross Section Inequality Than
  U.S.
• Higher Life Cycle Inequality (Flinn)
• Life Cycle Inequality Greater Because Mobility Is
  Lower

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Why? System Rigid
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Heavily Unionized
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High Tax Wedge
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High Effective Minimum
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Empirical Relationship Regulation and
Employment
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Inequality and Regulation
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Regulation and Job Tenure
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Adult Males are Not Affected Outsiders are
Affected
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Incentives to Acquire Skills WeakReturn to
Education Low
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Levels of Educational Attainment Low Incentives
for Excellence LowMany Italians Leave
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Restrictions In Other Markets Make Labor Markets
Less FlexibleProduct Market Regulation Strong
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Goes Hand in Glove With Labor Market Regulation
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Costs of Doing Business Great
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Barriers to Entrepreneurship High
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Barriers to New Technology
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Impairs RD, High Tech Investment
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Long-Term ConsequencesLess Foreign Direct
Investment(see Figures 19 20)
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Less Venture Capital(see Figure 21 22)
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Technology Intensity Weak
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Growth in Costs