Italy’s Labor Reforms, Explained

Giorgia Meloni cuts unemployment benefits and makes it easier to hire workers short-term.

Venice Italy restaurant
Restaurant in Venice, Italy, October 5, 2019 (Unsplash/Clay Banks)

Giorgia Meloni is cutting benefits for out-of-work Italians, reducing taxes for employers and making it easier to hire workers on a short-term contract.

Many of the reforms were in the prime minister’s election manifesto, but the reintroduction of job vouchers — a way to hire workers without a contract — is a surprise.

I’ll explain what’s changing, what isn’t — and why Italy’s labor market is such a mess.

The reforms

  • Reduce the “citizens’ income” from €780 to €350 per month.
  • The money can only be used for job training.

The citizens’ income was a jobseekers’ allowance introduced by the populist-left Five Star Movement in 2019 as a step toward a universal basic income. 4.8 million Italians receive it. Meloni’s right-wing coalition believes it discourages job seeking. (It’s unclear if it did, because the introduction coincided with the beginning of COVID-19.)

For parents of minors and Italians with disabilities, the allowance will be reduced to €500 per month.

Italians with disabilities also qualify for higher rental subsidies: €630 instead of the typical €280 per month. The average rent is €538.

  • Reduce the so-called tax wedge — the difference between what an employer pays and what a worker takes home — for those earning under €35,000 this year.

The one-time reduction will cost €4.5 billion. Extending it to the whole of next year would cost Meloni another €13 billion.

Italy has the fifth-highest tax wedge among industrialized nations: 46 percent compared to an average of 35 percent. Italian income tax rates are not exceptionally high, but it asks a lot of employers: three-quarters of social contributions, which fund unemployment insurance, parental leave and pensions, are paid by companies.

  • Waive taxes on benefits for employees with children on the first €3,000 of their salary.
  • €60 million for daycare and summer camps.

Half of Italian women are in work, the lowest female labor force participation rate in the EU. Italian men are twice as likely to start a business.

  • Additional tax breaks for entrepreneurs who hire young people neither in work nor studying.

The tax discount only applies this year.

48 percent of Italians under the age of 30 are in work, by far the lowest rate in the EU, where the average is 65 percent. Of those 48 percent, eight in ten work part-time.

  • Reintroduce job vouchers.

Instead of hiring workers through a contract, employers could buy vouchers from the government and use those as payment. Workers could redeem 75 percent of their cash value, with the remaining 25 percent going to social security.

The idea was to regulate agricultural and domestic work, like cleaning, gardening and home care, which often was — and still is — undeclared to avoid paying taxes.

But the vouchers were so popular — because it’s so expensive to hire workers on a regular contract — that their use exploded to 1.7 million hires in 2015, 8 percent of the working population.

Previous governments tried to rein in the use of vouchers by capping them at €2,500 per worker per employer. They were also restricted to freelancers and firms with at most five employees. When employers found ways around those restrictions, the vouchers were abolished.

Meloni is bringing them back for seasonal work in agriculture and tourism.

The politics

Business has strong ties to Italy’s center-right. Not so much to Meloni’s Brothers of Italy, which until a few years ago was considered fringe, but certainly to former prime minister Silvio Berlusconi’s Forza Italia and Matteo Salvini’s League, which used to argue for the secession of the industrial north of Italy from the largely agrarian south.

Replacing the citizens’ income with “more effective measures of social inclusion and job creation” was a campaign promise. (Whether tax cuts will prove more effective remains to be seen.)

So was cutting taxes for families. To make it easier for couples to have children and to make it easier for women to work.

An extra benefit for the right is that Italy, which has the largest share of retirees in Europe (24 percent), would need fewer labor migrants if couples had more babies.

What won’t change

€60 million for summer camps is a pittance. Meloni promised free nurseries.

She is not tackling regulations that make Italy one of the worst countries in Europe to start and run a business in. It takes too long to get permits, to enforce contracts and to resolve bankruptcies.

Nor is she relaxing licensing requirements that make it almost impossible to start a career as a lawyer, notary, pharmacist or even a taxi driver.

Why Italy’s labor market is a mess

Real incomes (adjusted for inflation) have barely grown in Italy in two decades, when they grew 25 percent on average in France, Germany and Spain.

As in most EU countries, firing employees is costly (severance typically equals a year’s salary) and time-consuming. Wages are negotiated with unions on an industrywide basis. Hence the proliferation of short-time contracts, but they don’t give workers pension and social-security rights, widening the gap between generally older, well-off employees and younger, precarious contractors who hop from job to job without being able to save up money to buy a home and start a family.