Tuesday, 21 January 2014

The Italian jobs act

'Jobs act' is what Matteo Renzi, the newly elected leader of the centre-left Democratic Party in Italy has called his proposed bill for economic reform and job creation. The English title is presumably a reference to Obama's American Jobs Act of 2011. And why should Italy not take inspiration from the US? Obama's jobs act was defeated in congress but the other elements of his economic policy which were based on the same principles have worked comparatively well. The economic recovery in the US has been much stronger in the US than in Europe and in particular the job market looks a lot better. (See an up-to date summary.) In the European context Italy is doing particularly badly. Not as badly as Greece or Spain but still unemployment has reached nearly 13% and youth unemployment is above 40%.

So is this Renzi emulating Obama? A case of successful learning from very recent history? Unfortunately not. The two draft bills don't have much more in common than the title. The core provisions of Obama's bill would have cut 245 billion USD of payroll taxes to increase workers net pay. It would also have extended unemployment benefits that were running out to the tune of a total 50 billion USD and spend over 100 billion USD for infrastructure projects, the modernisation of schools and colleges as well as the hiring of additional teachers, firefighters, etc. At the time economists expected the bill to create over a million jobs within a year and add more than a percentage point of growth to the US economy. All of this as a result of a 'positive boost to aggregate demand'. In other words, this was a thouroughly Keynesian bill.

Renzi's job act is a very different animal. It's about creating a more flexible and dynamic labour market. The basic idea here is that if it becomes easier to hire and fire people then more people will be hired. In this view rigidity of the labour market is causing unemployment. If we become better at matching supply and demand for labour then unemployment will decline. But that supposes that somewhere hidden there is a significant demand for labour that merely needs to be unleashed or that lower costs will somehow lead to an increase in output. This is completely different from Obama's proposal that was based on the view that demand needed to be increased through government spending and tax cuts.

Despite its American title Renzi's bill is based on the same notions that have underpinned European economic policies over the last years. If the proposal becomes law it will work just as well as Europe's policies have worked so far.

NB: The Euro of course limits the political choices that Italy can undertake individually. But the Eurozone as a whole would be very well advised to emulate some of the more demand oriented policies that have been applied in America.

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