Flexibility, Job Creation and Globalization: The Case of Italy James J. Heckman University of Chicago December 2002

Problem: High Level of Unemployment a)Rising Over Past 30 Years b)Structural 1) Weak Incentives To Invest in Human and Physical Capital 2) Impaired Ability to Respond to Changes and Opportunities Due to Bureaucratization and Regulation

Main Points 1)High Welfare Cost of Taxes, Regulation, Unionism 40%-100% of each Euro Security and Insurance Come at a Price 2)High Level of Distortions Cannot Explain Growing Unemployment and Sluggishness a) More variability and opportunities b) System impairs Italy’s ability to respond

3)Open Markets Imply Uniformity of Prices, Equalization of the Returns to Capital 1) Rising worker mandates paid in lower wages 4)New Economy: Diverse Opportunities and Much Change 5)Many New Opportunities 6)Need to Respond and Adapt to Local Conditions 7)British Unionism vs Italian Unionism

Some Facts 1. OECD employment high and rising

2) Unemployment Long-Term

3) Concentrated Among Youth

4) Structural, Not Keynesian Not a Phillips Curve Phenomenon

5) Recent Decline Due to Recent Reforms

Italy has Lower Cross Section Inequality Than U.S. Higher Life Cycle Inequality (Flinn) Life Cycle Inequality Greater Because Mobility Is Lower

 Why? System Rigid

 Heavily Unionized

 High Tax Wedge

 High Effective Minimum

 Empirical Relationship Regulation and Employment

 Inequality and Regulation

 Regulation and Job Tenure

 Adult Males are Not Affected; Outsiders are Affected

 Incentives to Acquire Skills Weak Return to Education Low

 Levels of Educational Attainment Low; Incentives for Excellence Low;Many Italians Leave

 Restrictions In Other Markets Make Labor Markets Less Flexible Product Market Regulation Strong

 Goes Hand in Glove With Labor Market Regulation

 Costs of Doing Business Great

 Barriers to Entrepreneurship High

 Barriers to New Technology

 Impairs R&D, High Tech Investment

 Long-Term Consequences Less Foreign Direct Investment (see Figures 19 & 20)

 Less Venture Capital (see Figure 21 & 22)

 Technology Intensity Weak

 Growth in Costs