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Analysis: Six months on, Monti's labor reform has changed little

Italy's outgoing Prime Minister Mario Monti gestures during a news conference in Rome December 28, 2012. REUTERS/Tony Gentile
Italy's outgoing Prime Minister Mario Monti gestures during a news conference in Rome December 28, 2012. REUTERS/Tony Gentile

By Gavin Jones

ROME (Reuters) - Overhauling Italy's rigid labor rules was supposed to be Mario Monti's flagship reform.

It required drawn out, often heated bargaining with unions, employers and political parties. Yet six months after their approval the measures seem to be having little effect on hiring, firing or the labor market in general.

The technocrat premier's aim was to encourage hiring of permanent rather than temporary workers and to make it easier for firms to shed staff during economic downturns. Businesses and workers' bodies say it is doing neither.

Monti, who resigned as prime minister last month, hoped to boost a chronically low employment rate and end a "dual" labor market made up of over-protected older workers and millions of mostly young people on temporary jobs with no labor rights.

However, he quickly ran into strong opposition, led by the CGIL union which found support from the centre-left Democratic party (PD) that he relied on for his majority and which is now, polls suggest, likely to win February elections.

The unions, which largely represent older, more protected workers, held a series of strikes and protests to defend existing job protection. Labor minister Elsa Fornero, who drew up the reform proposal, became a hate figure for millions of workers.

After being watered down during a lengthy passage through parliament, the final version of the plan, approved in June last year, slightly eased firing restrictions in large and medium sized firms and made temporary hiring more costly.

Unions warned it could lead to a firing spree, while businesses said it would discourage new hires. Six months on, unionists now admit their fears were exaggerated, but employers say their concerns are being confirmed.

"There is no evidence that companies are firing more under the new rules. It just isn't happening," said Pierangelo Albini, responsible for labor issues at employers' lobby Confindustria.

No official data is available on the number of workers who have been dismissed under the new norms but even the unions, which are monitoring the situation closely, estimate the figure is negligible.

They were quick to denounce isolated cases concerning telecoms companies Huawei and Vodafone, which attracted attention in Italian media, yet each one involved no more than a couple of workers.

"The reform doesn't actually change much in terms of firing procedures," said Michele Tamburini, a labor lawyer with a U.S. law firm in Milan. "Potentially, it could make firing easier but it all depends how it is interpreted by judges and hardly anyone wants to test it."

Tamburini said he and his colleagues at other firms had seen no rise in new business in the form of contested dismissals, as some commentators had expected.

PROBLEMS REMAIN

Monti, who says he will seek a second term at the Feb 24-25 election, initially defended the reform as a good compromise but now acknowledges its limits and blames the left-wing CGIL union for blocking more radical changes.

In a new policy platform presented before Christmas he urged a "drastic simplification" of labor market rules to "overcome the dualism between protected and unprotected workers". These were exactly the goals his reform was meant to achieve.

"Monti's intentions on the labor reform were right but the politics of it were all wrong," said Riccardo Barbieri of Mizuho International. "The PD couldn't let him make firing easier in a pre-election period and in the middle of a recession."

Despite criticism of some of his reforms, investors would love to see the former European commissioner stay on after the election, ideally at the head of a more cohesive majority that allows him to push through his new agenda.

Tens of thousands of workers have lost their jobs since the labor reform was passed as companies close or downsize, but they are still shedding staff under the old terms rather than risking difficulties by trying to capitalize on the reform.

"There has been very little recourse to the new rules," said Giorgio Santini, head of labor issues for the CISL trade union, Italy's second largest.

One reason may be that firing procedures are more complicated than ever because the changes have increased the discretionary power of the courts.

The reform made it possible for private firms with more than 15 employees to fire individual workers for business reasons, such as a fall in demand, without necessarily having to re-instate them if a judge ruled the dismissal was unjustified.

In smaller firms, where job protection was much weaker, nothing changed under the reform. The public sector, where protection is strongest of all, was also unaffected.

Companies were always able to shed staff if they were restructuring or closing a product line but it was much harder to fire people for poor performance or other reasons. Paradoxically it was easier to shed 10 or 20 workers than one or two.

The courts can now order firms to offer wrongly dismissed workers financial compensation rather than giving them their job back. However, if the unfair dismissal is for discriminatory or disciplinary reasons, re-instatement is still obligatory.

Judges now have to decide not only whether a dismissal is justified but also whether it is being attempted for business reasons, disciplinary reasons or due to discrimination.

Unions have been ready to fight any cases where they suspected firms were presenting bogus business reasons to shed workers considered difficult or disruptive. Yet even the leftist CGIL union said few had emerged.

"There have been maybe a couple of hundred cases that firms have tried to justify under the new rules, and in many we have seen evidence of discrimination and we've contested them," said the CGIL's head of labor policy Claudio Treves.

Other unions put the figure considerably lower.

APPRENTICESHIP FLOP

Santini of the CISL union said a positive aspect of the new rules was that they oblige firms to co-ordinate more pre-emptively with unions before trying to fire, meaning that shedding staff had not actually become easier at all.

He said that with the unions acting as mediators there are signs that dismissed workers are more willing to come to terms for financial compensation rather than taking their cases through the courts, though he added that this had often happened even before the reform.

Yet if firing has not become easier, hiring has become more difficult, according to both the CISL and Confindustria.

Monti tried to boost the role of apprenticeships, taking Germany as a model, to replace temporary or "precarious" contracts that are seen as the unacceptable face of the dual labor market. These contracts were not scrapped, as some experts urged, but the rules for using them were tightened.

However, both the CISL's Santini and Confindustria's Albini said apprenticeships have failed to take off because of too much bureaucracy and a rule - required by Italy's Constitution - that regional governments must be partly responsible for organizing the apprenticeship courses, something they are failing to do.

"What is happening is confirming some of our worries," said Albini. "It's no easier to fire but it is more expensive and complicated to hire on a temporary basis, which is important flexibility especially at a time of crisis."

When the labor reform was being watered down in parliament last spring two of Italy's leading economists, Alberto Alesina of Harvard in the United States and Francesco Giavazzi of Milan's Bocconi University, warned Monti of the dangers of a weak compromise.

"Making do with marginal adjustments would be worse than not doing anything because it would create the illusion that a problem has been solved when it isn't true," they said in a joint newspaper column. Their fears now seem well grounded.

European Central Bank President Mario Draghi said in November it remained "fundamental" that Italy reform its labor market to make it less rigid. Yet it is unlikely that unions or leftist parties will consider returning to the issue soon.

(Reporting by Gavin Jones)

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