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Rome vs. the Unions

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Rome vs. the Unions

Relative to Italy's debt problems, the country's biggest impediment to growth gets relatively little international press. Burdensome labor regulations are nothing new to Italians. But even discussing the possibility of modernizing these laws has long been politically taboo.

The most onerous law is a relic of the 1970s and a touted accomplishment of Italy's trade unions. Article 18 of the Workers' Statute makes it impossible to fire even the most grossly incompetent employees. Perversely, it causes that which it seeks to prevent: unemployment.

According to the law, employers need to demonstrate not only that a terminated employee has failed in fulfilling work "objectives" and "expected performance," but also must prove "the concrete and wanton negligence of the employee in achieving the work's obligations." The only "just cause" for termination is the deliberate refusal to perform whatever an Italian labor court deems necessary to fulfill "the work's obligations." Could a law be any vaguer?

If the court determines the employer has insufficient evidence, the employer must rehire the employee, fork over lost salary and pay a fine. Businesses with fewer than 15 employees have a choice between rehiring the employee or paying him 15 months of vacation—er, severance—before being able to send him on his way.

The courts aren't exactly impartial, either. Andrea Ichino, an economist at the European University Institute, found that justices sided with the terminated employee much more frequently in regions with high unemployment than in regions with low unemployment. With a court system slanted against business, entrepreneurs just don't want to take the risk of hiring new employees whom they may not want or need in the future.

This perverse regulatory environment has helped Italy earn the World Bank's second worst "Doing Business" ranking out of all OECD countries. Only Greece is worse. Dr. Stefano Scarpetta of the OECD found that new Italian firms increase their headcounts by 20% in their first two years, compared to 160% in the United States.

Italy's labor laws favor insiders who already have jobs at the expense of outside job seekers. Ironically, these laws hurt the very people upon whom those insiders will depend to support their pensions when they retire—the young. Italy's youth unemployment rates consistently rank among the highest in the EU. It averaged 5.8 percentage points above the EU average from 2001 to 2010, according to Eurostat.

Meanwhile, the labor force is getting older by the year. Between 2001 and 2010, the share of total employment among Italian workers between ages 50 and 70 steadily increased, while it decreased among workers younger than 50, according to OECD data.

Facing these trends, former Prime Minister Silvio Berlusconi in 2002 proposed a temporary four-year suspension of Article 18's rehiring clause, though employers still would have had to pay the 15 months of severance. Even this minor change proved impossible. Italy's most powerful trade union assembled one million protestors to march in Rome against any such reforms.

Now, Prime Minister Mario Monti and Labor Minister Elsa Fornero have pledged to make labor reforms in an effort to put an indebted and economically stagnant Italy on a path to sustainable growth. That's more easily said than done.

Ms. Fornero recently suggested an extension of the "trial" employment period—the time before an employee is entitled to the benefits within Article 18—to three years. A political firestorm ensued, as unions loudly decried the proposal and continued to deny Article 18's negative impact on employment. Ms. Fornero backed down but has not shelved the issue just yet. In a recent television appearance, she said she was "saving it for last."

But most past attempts at reform have run up against Italian politicians' cowardice in taking on the country's powerful unions. Mr. Monti and Ms. Fornero are setting the stage for a major battle this month, when they will try to reform Article 18 as well as other archaic labor laws that have been an anchor on Italy's growth for almost half a century.

Mr. Monti and Ms. Fornero will encounter enormous opposition, and success is by no means guaranteed. But the mere fact that they and other Italian politicians are even talking about such a taboo topic may finally signal the change Italy so badly needs.