Does Flexibility bring Employment? Survey by UVI - Senate

This recent (January 2018) report by the Impact Assessment Office of the Italian Senate provides a comprehensive but easyly readeable survey of the economic literature dealing with EPL and its consequences on employment, workers inflows and outflows, innovation, growth.

Results are rarely conclusive. While it is possible to recognize a negative effect of more pervasive EPL on inflows and outflows to / from the status of employed, apparently not significant relationship exists between the degree of EPL and the level of total employment or the overall dynamics of the economy..

Moreover, moving from short to medium and long-term horizon, it becomes more and more evident the possibility of multiple effects, also in opposite directions, stemming from reforms of EPL in either sense of a stenghtening or a relaxation.

Just to give an example, a lower EPL could offer firms the possibility to fine tune employment with respect to economic downturns and so save costs, sustain productivity and react more promptly to a crisis. But, on the other side, lower levels of EPL normally imply lower bargaining power of workers and Trade Unions and lower average compensations which, at the end, can weaken aggregate demand and aggravate downturns.

But this is only one of the situations in which EPL can function as a double-edged instrument. Just to give another example, temporary workers or workers than can be easily fired are less inclined to invest in human capital and to increase knowledge, capabilities and productivity, and this may lead the economy on a growth-path below the potential, with repercussions both in terms of profits for firms and of loss of employment for families and consumers.

Nonetheless, it is true that ELP particularly rigid can play as a disincentive / deterrent to start and expand firms and enterprises. It can also provoke amplifications of economic cycles instead of helping to smooth them.

The final "morale" one can trace out of UVI survey is double-facet:

1) Firsty of all, avoiding ideological standpoints and extreme choices on an issue that is plenty of endogenous links with the rest of the economic system and the institutional framework;

2) Second, contextualizing as much as possible the design (and reforms) of EPL taking into account the structure of the welfare systems, country-specific aspects of the labour market, the distribution of firms by dimension and specialization,  the level of investments in fixed and human capital, Labour Law and so on.

EPL and its evolutions over time should not be a separate and disconnected part with respect to the socio-economic system. General standardized ready-to-apply rules should be carefully pondered.

Maybe it could sound as obvious and pure commonsense, but indeed economics is there also to remind and support it.