Easing Job Protections Made Italian Firms Stronger but Workers Relatively Weaker

A study by the Asian Development Bank Institute and Confindustria finds that Italy’s 2014 Jobs Act boosted firm productivity and investment but reduced workers’ share of income. The reform made companies more dynamic and efficient—yet widened the gap between capital and labor.

A landmark study by the Asian Development Bank Institute (ADBI) and Confindustria, Italy’s top business federation, has found that loosening job protection laws boosted company productivity but also widened the gap between workers and employers. The research, titled “Deregulating Job Protection: Evidence on Productivity and Income Distribution from Italy,” by economists Gabriele Ciminelli and Guido Franco, examines how the 2014 Jobs Act reshaped Italian workplaces and economic rewards. The findings show that deregulation made firms leaner, faster, and more innovative, yet left workers with a smaller share of the benefits.

The Jobs Act: A Turning Point for Italian Workplaces

Introduced by then–Prime Minister Matteo Renzi, the Jobs Act scrapped the rule that required firms with more than fifteen employees to reinstate workers dismissed without just cause. In its place came financial compensation based on seniority, while smaller firms continued under the old, more flexible system. This size-based threshold created a natural experiment for economists to measure the law’s true effects. Alongside this, a three-year hiring incentive allowed companies to skip social security contributions for new permanent hires, worth up to €8,060 annually.

The reform aimed to end decades of labor market rigidity that discouraged permanent hiring. But not everyone embraced it. Later governments partially reversed some measures through the 2018 Dignity Decree, which increased severance pay and reintroduced limited reinstatement rights. Still, the reform remained largely intact, and a 2025 referendum to undo it collapsed due to low voter turnout.

Productivity Soars as Firms Gain Flexibility

Using data from more than 400,000 Italian firms between 2011 and 2019, the researchers compared businesses just above and below the fifteen-employee threshold. The results were striking: companies affected by the reform saw total factor productivity rise by around 1 percent per year, while labor productivity jumped nearly 2 percent. Investment in machinery, digital tools, and technology, the so-called capital deepening, grew by about 4 percent over five years.

The gains were especially strong in the services sector, where firms could more easily adjust staffing and adopt new digital systems. The study argues that with lower firing costs and legal risks, companies were more willing to innovate, automate, and reorganize operations. The reform also helped labor flow more efficiently toward productive firms. Before the Jobs Act, companies that were 10 percent more productive grew only 0.6 percentage points faster in employment; after the reform, the gap widened to 0.7, showing that efficiency now guided job growth.

Workers Gained Less Than Firms

While companies grew stronger, workers captured a smaller slice of the economic pie. Wages in affected firms rose modestly, about 0.9 percent, but far below productivity growth. This led to a decline in labor’s share of income by up to 0.7 percentage points within five years. In plain terms, businesses and shareholders kept more of the value created, while workers’ relative earnings fell.

The authors explain that this imbalance stems from weaker worker bargaining power after job protections were eased. Although employees didn’t earn less in absolute terms, their share of the gains shrank. The effect peaked between 2015 and 2017, before tapering off after 2018 when new political uncertainty emerged. The study also rules out the idea that hiring subsidies drove the improvements, since all firms, big or small, received similar benefits.

The Global Debate: Efficiency vs. Equity

The Italian experience revives a long-standing debate about whether strict job protection helps or hinders productivity. Earlier studies gave mixed results: some argued that rigid labor laws discouraged growth, while others claimed they promoted stability and skill development. This new research provides rare causal evidence that reducing employment protection boosts productivity, but it also shows that income inequality widens as a result.

The lesson, according to the authors, is clear: labor market reforms can make economies more dynamic but must be paired with strong safety nets such as unemployment insurance and retraining programs. Without these, deregulation risks eroding worker welfare even as it raises efficiency.

Lessons Beyond Italy

The findings hold valuable lessons for developing economies, particularly in Asia. Many countries in the region face a dual challenge: overly rigid labor rules for formal jobs and widespread informal employment. The Italian case suggests that easing excessive protection can encourage formalization and boost investment, but only if accompanied by policies that protect vulnerable workers.

In essence, the 2014 Jobs Act transformed Italy’s corporate landscape. Firms became more agile, competitive, and ready to innovate. Yet, the benefits tilted toward employers, showing that economic flexibility often comes at a social cost. As the ADB Institute study concludes, deregulation can drive growth, but fairness requires deliberate policy choices to ensure that prosperity is shared, not concentrated.