Flexibility, Job Creation and Globalization: The Case of Italy

James J. HeckmanUniversity of Chicago

December 2002

Problem: High Level of Unemployment

a) Rising Over Past 30 Yearsb) Structural

1) Weak Incentives To Invest in Human and Physical Capital

2) Impaired Ability to Respond to Changes and Opportunities Due to Bureaucratization and Regulation

Main Points

1) High Welfare Cost of Taxes, Regulation, Unionism40%-100% of each EuroSecurity and Insurance Come at a Price

2) High Level of Distortions Cannot Explain Growing Unemployment and Sluggishness

a) More variability and opportunitiesb) System impairs Italy’s ability to respond

3) Open Markets Imply Uniformity of Prices, Equalization of the Returns to Capital

1) Rising worker mandates paid in lower wages

4) New Economy: Diverse Opportunities and Much Change

5) Many New Opportunities6) Need to Respond and Adapt to Local

Conditions7) British Unionism vs Italian Unionism

Some Facts1. OECD employment high and rising

2) Unemployment Long-Term

3) Concentrated Among Youth

4) Structural, Not Keynesian Not a Phillips Curve Phenomenon

5) Recent Decline Due to Recent Reforms

Italy has Lower Cross Section Inequality Than U.S.

Higher Life Cycle Inequality (Flinn)

Life Cycle Inequality Greater Because Mobility Is Lower

Why? System Rigid

Heavily Unionized

High Tax Wedge

High Effective Minimum

Empirical Relationship Regulation and Employment

Inequality and Regulation

Regulation and Job Tenure

Adult Males are Not Affected; Outsiders are Affected

Incentives to Acquire Skills WeakReturn to Education Low

Levels of Educational Attainment Low; Incentives for Excellence Low;Many Italians Leave

Restrictions In Other Markets Make Labor Markets Less FlexibleProduct Market Regulation Strong

Goes Hand in Glove With Labor Market Regulation

Costs of Doing Business Great

Barriers to Entrepreneurship High

Barriers to New Technology

Impairs R&D, High Tech Investment

Long-Term ConsequencesLess Foreign Direct Investment(see Figures 19 & 20)

Less Venture Capital(see Figure 21 & 22)

Technology Intensity Weak

Growth in Costs