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ECB chief Draghi holds up Renzi's Jobs Act as exemplary reform

Xinhua, December 1, 2016 Adjust font size:

A recent labor market reform in Italy has tackled the issue of job creation among small businesses but more must be done across the eurozone, which has a rapidly aging workforce and too many unemployed young people, European Central Bank (ECB) President Mario Draghi said Wednesday.

Small and medium enterprises (SMEs) contribute 80 percent of national employment and 67 percent of value added in Italy, the third and fifth-highest shares in the OECD area respectively.

SMEs also account for over 50 percent of total export volume and 25 percent of business R&D investment, according to an OECD study on Italy.

However, the OECD paper noted that Italy's small businesses are underperforming, because approximately 95 percent of them are micro-firms with less than 10 employees, and another 4.5 percent are small firms with less than 50 employees.

Draghi attributed this to excessive regulation, making it unprofitable for companies to hire.

"There is evidence that productive firms choose not to grow rather than cross the threshold and incur greater administrative expenses. Recent reforms in Italy ... have sought to address this problem," said Draghi, who is Italian, in reference to Prime Minister Matteo Renzi's signature Jobs Act.

Such structural reforms to boost productivity and reduce structural unemployment are essential if the eurozone is to ward off a drop in per capita income as its population ages and new generations fail to take their place, but governments are reluctant to carry them out because they can be perceived as unpopular in the short term, the European central banker said.

Indeed, Renzi's fiercely contested Jobs Act sparked a general strike, student and worker protests that turned violent in several cities from north to south, and an insurrection among the leftist ranks of the prime minister's center-left Democratic Party (PD), which eventually led to the creation of the small splinter Italian Left (SI) party.

The Jobs Act makes it easier for companies to sack newly hired staff, institutes a new open-ended labor contract with increasing worker protections to replace the many temporary contracts that proliferated in Italy as employers tried to avoid high labor taxes, and provides tax breaks for companies making new hires on permanent, steady contracts.

Renzi called it a "Copernican revolution" that "gives more protection to those who need it and more freedom to those who want to invest".

The Jobs Act became law in December 2014, when unemployment stood at 13.2 percent. By 2016, unemployment hovered at 11.5 percent, according to a November report by Istat national statistics bureau.

The reform's impact "translates into an increase in labor productivity growth of 0.04 percent a year" and could raise GDP by 0.1 percent by 2020, according to an April, 2016 European Commission paper. Endit