Does Weaker Employment Protection Lower the Cost of Job Loss?

Abstract

Leveraging a major Italian reform enacted in July 2012 that eroded employment protection to workers on permanent contracts, we use detailed worker level administrative data to estimate how this reduction affected the cost of job loss. We employ a stacked event-study research design, comparing treated and untreated workers as they move from employment into nonemployment. Weakening employment protection led to additional penalties in terms of lower re-hiring earnings and lower re-employment probabilities. Heterogeneous effects of the reform deepened pre-existing divides, penalizing labor market outsiders, such as young workers, and curbing employment opportunities for individuals in poorer regions, such as the South.