Lia Pacelli (University of Torino)

Labor seminar

The effect of the end of hiring incentives on job separations

Abstract. We analyse the impact of the end of the hiring incentives introduced in Italy through the Budget Law for 2015 and 2016 on job separations. The hiring incentives were applicable to all new openended contracts stipulated in 2015 and 2016, and consisted respectively in about a 100% and 40% reduction of the worker’s social security contributions. The aim of the subsidies was to encourage firms to use open-ended contracts for new hires. We study the long-term impact of the policy, evaluating the risk of separation once the incentives came to an end. The literature on this aspect is surprisingly scant, despite the widespread use of this kind of policy. The econometric model used is a non-linear difference in differences applied to a competing risk duration model. This technique allows to evaluate the causal impact of the end of the policy under scrutiny.
Overall, the results of the analyses show that the end of the hiring incentives entails an increase in separations, particularly in small firms. This is likely due to the fact that the relative financial impact the incentives have on small firms is higher than on larger ones. Furthermore, there is a protective effect of the hiring subsidies against job to non-employment separations during the first months of the subsidized job spells. Concerning the heterogeneity analyses, it emerges that the stronger effects on the probability of separations hit the more disadvantaged groups (less educated, less skilled, foreigners), that are also those enjoying a higher protective effect while the subsidies are in place. This combination is mostly concentrated among small or non-innovative firms. In a nutshell, it emerges quite clearly a pattern related to human capital, mainly in firms with a lower productivity or more likely to compete on costs rather than on innovations (small firms, firms in the service or non-innovative sectors): low human capital workers face a higher risk of job termination at the end of the hiring subsidy, while enjoying a lower probability to move to nonemployment while the subsidies are in place.
We can interpret this pattern imagining that human capital does not catch up with the increased cost of labour when subsidies end. In other words, the subsidy reduced the gap between the expected productivity and labour cost, so that till this lasts the match is profitable; afterward the match is too costly, given the level of productivity, and becomes more likely to be terminated.

Joint with Chiara Ardito, Fabio Berton, Chiara Quaglia.