Italy plans major labor overhaul in bid to help youth

Prime Minister Mario Monti's government outlined plans for a major overhaul of Italian labor laws, a domestically controversial effort that anchors the economic revival Italy promised the European Central Bank last year as it was pulled into the Continent's debt crisis.

The measures, which were hashed out during a marathon meeting on Tuesday night among ministers, labor unions and business leaders, aim to usher millions of young Italians into the job market and help the country's struggling companies manage economic downturns by cutting jobs—but also create a wider safety net for the jobless.

The measures still need to be presented and approved by Parliament—a process Mr. Monti has promised to begin by the end of the month. And other hurdles remain. Italy's largest labor union—the CGIL—didn't sign off on a key part of the overhaul, raising the specter of possible labor unrest. Italy's business lobby also said it wasn't entirely satisfied, meaning further negotiations may lie ahead.

"If Parliament backs us, we will be able to say that Italy's labor market has modernized, and that there are no more hurdles to foreign investment," Mr. Monti said during a news conference, days before he heads on a planned trip to Asia, partly to speak with foreign investors.

Tackling Italy's inefficient labor market is seen as a key challenge facing Mr. Monti's technocrat government as it tries to reverse years of economic stagnation in the euro zone's third-largest economy.

European Central Bank President Mario Draghi—both in his current role and in his previous position as head of Italy's central bank—has long urged a rebalancing of Italy's labor market to make it less burdensome for companies but also more inclusive, particularly for young people and women.

Only 57% of working-age Italians have jobs, while two million people are unemployed.

The unemployment rate for people between the ages of 15 and 24 years old stands at 31.1%, compared with 7.8% in Germany, according to the European statistics agency Eurostat.

At the same time, despite its reputation for having a generous welfare state, Italy has one of the lowest levels of unemployment benefits in Europe, spending some 3.1% of gross domestic product on such services in 2010, compared with 4.1% in Germany and 8% in Denmark and Belgium, according to estimates by the Organization for Economic Cooperation and Development.

The most controversial measure unveiled on Tuesday night aims to revamp Italy's 40-year-old workers' statute, which says, notably, that workers who are laid off by their employers—for any reason—can appeal in court, and judges can force companies to rehire them if the layoff was "without just cause."

This system has effectively created a two-tier labor market, with older workers in ironclad jobs and younger employees in temporary ones that are easier to shed in hard times. The clause has also left labor decisions mired in years of legal battles in Italy's slow courts.

The proposed labor measures would allow companies to lay off a worker for economic reasons without giving them legal recourse. But in exchange that worker would get monetary compensation that can reach up to 27 months' salary, Italy's Welfare Minister Elsa Fornero said during a news conference. Automatic reinstatement would remain only in cases of proven discrimination.

Stefano Scarpetta, head of employment analysis at the OECD, said immediate payment of compensation should be a relief to both companies and employees because it removes the uncertainty of years of costly legal battles that often ensue when businesses have to downsize. In Spain, he said, companies prefer to pay employees a compensation—which is usually 45 days of salary for every year worked—rather than risk such a legal bout.

But Emma Marcegaglia, head of the employers' lobby, said the 27-month compensation was way too high of a cost for companies and should be revised significantly.

There could also be unintended consequences for older workers, said Antonio Bruzzone, senior manager at Fiera di Roma SpA, a trade-fair organizer.

"There's no doubt I'd want to shed older workers, those above 55, in order to keep the younger ones, who I reckon outperform by a factor of two," Mr. Bruzzone said.

Companies would continue to be able to hire people on short-term contracts, but these contracts would be more expensive—raising the company's costs by some 1.4%, Ms. Fornero said. Companies would also be encouraged to offer apprenticeship programs to young people, helping train them for future jobs.

Another key plank of the labor overhaul is inspired by the Scandinavian and Dutch labor models of so-called flexicurity which—while giving businesses more flexibility in managing their work force, also grant workers a greater safety net if they are between jobs.

The new overhaul would provide a universal unemployment insurance, as opposed to the limited one that only applies to workers in cradle-to-grave contracts and largely those in industrial sectors.

Workers under the age of 54 who lose their jobs will be able to rely on one year of unemployment benefits, and up to €1,119 a month of jobless insurance, Ms. Fornero said. The total cost of the new insurance fund is €1.8 billion.

"This part of the reform brings Italy close to other European countries and introduces a better balance between flexibility and worker protection," Mr. Scarpetta said.

But the head of the CGIL promised war. "We will do whatever it takes to fight this reform," said Susanna Camusso, head of the CGIL union. "We will mobilize as necessary and it won't be brief."

(Published by WSJ - March 20, 2012)