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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