The debate over employment protection legislation has regained momentum across Europe, particularly in the wake of the post-pandemic recovery, persistent youth unemployment, and rising inequality. A widely cited argument in favour of easing employment protection rules is that greater flexibility in hiring and firing can lead to more efficient job matching and, ultimately, higher productivity (Bertola and Ichino 1995, Mortensen and Pissarides 1999, Boeri 2011, Cahuc and Zylberberg 2004, Kugler and Pica 2008). Recent empirical research lends support to this view, showing that the cost of job termination tends to be higher in countries with more stringent employment protection legislation and where the generosity of the welfare state tends to be the lowest (Bertheau et al. 2022, 2023).
However, these potential efficiency gains may come at a considerable cost for certain groups of workers. Losing one’s job is always painful – but how costly is it, in terms of lost earnings and diminished prospects of re-employment? And what happens when the rules designed to protect workers are fundamentally changed?
In Italy, the 2012 ‘Fornero Reform’ marked the first major intervention to scale back protections for workers on permanent contracts, following a series of policies that had progressively liberalised the use of temporary employment. Introduced during the sovereign debt crisis, it aimed to reduce labour market dualism. In our recent study (Francesconi and Sonedda 2025), we examine how the reform affected the cost of job loss for individual workers, focusing on both earnings losses and re-employment trajectories.
The Fornero Reform: A structural shift in employment protection
The Fornero Reform was enacted in 2012 under intense fiscal and market pressure. One of its most consequential provisions was a significant restriction of the right to reinstatement following unfair dismissal – a right that had been a central pillar of Italian employment protection since 1970. The reform replaced reinstatement with monetary compensation in most cases, thereby lowering the legal and financial risks associated with dismissals for employers. The stated objective was to encourage firms to offer more open-ended contracts, helping to bridge the divide between permanent and temporary employment. Yet the question is not only whether employers changed their hiring practices, but also how the reform affected all workers who experienced job loss – whether they were formally dismissed or not. In a system with strong employment protections, the true nature of a job separation can be ambiguous, and the boundary between individual dismissals and voluntary quits is often blurred. As Di Addario et al. (2023) note, employers may use severance payments strategically to induce workers to enter unemployment or accept external job offers they might otherwise refuse (see also Postel-Vinay and Turon 2014). In such a context, the overall composition of workers entering the re-hiring market may not have changed substantially around the time of the reform, even if the reasons for job loss became more diverse.
Data and method: Measuring the individual cost of job loss
To assess the impact of the Fornero Reform, we draw on administrative data from the Comunicazioni Obbligatorie – a dataset maintained by the Italian Ministry of Labour and Social Policies that records all formal job transitions. We track cohorts of workers who lost their jobs for any reason, including dismissal, expiry of fixed-term contracts, resignation, or other forms of separation.
Our empirical strategy follows a difference-in-differences approach. We focus on individuals whose employment histories can be observed over a 47-month window (13 months before and 33 months after job separation). This timeframe allows us to analyse both short- and medium-term outcomes. Each worker is assigned to a cohort based on the month of their first observable separation within this window.
We compare post-separation trajectories in employment probabilities and hiring earnings, relative to the month preceding job loss (first difference), between the cohort experiencing the separation and the immediately following cohort that has not yet separated (second difference). This difference-in-differences analysis is applied separately to two groups: workers who lost their jobs prior to the reform (between July 2010 and June 2011, the control group) and those who lost their jobs after the reform (between July 2012 and June 2013, the treatment group). In doing so, we obtain separate estimates of the cost of job loss for each group. The impact of the reform is then identified as the difference in job loss costs between the treatment and control groups.
We do not restrict our analysis to workers who were formally dismissed but include all separations. This broader lens enables us to capture any spillover effects the reform may have had on overall labour market dynamics.
Findings: The cost of job loss increased
Our findings indicate that job loss became more costly following the Fornero Reform. As shown in panels (d), (e), and (f) of Figure 1, 12 months after separation, workers affected by the reform faced a 15% greater hiring earnings penalty in their subsequent employment compared to the control group. They were also seven percentage points less likely to be re-employed, with no statistically significant effect on the probability of securing a permanent position.
Figure 1 Benchmark effects on labour market outcomes
Adverse effects persisted even after three years: workers in the treatment group continued to have 4% lower rehiring earnings and were one percentage point less likely to be re-employed than their pre-reform counterparts. Although only the treated group was exposed – after 21 months – to the 2015 Jobs Act and associated hiring incentives for open-ended contracts, these later policies only partially offset the medium-term effects of the 2012 reform.
These results are not limited to workers who were dismissed. As illustrated in Figure 2, the negative effects on re-employment probabilities and post-separation hiring earnings are evident across all types of job separation. This suggests a broader shift in the cost of job loss, extending beyond dismissals to the wider pool of separated workers. A likely mechanism is that, although the overall number of separations did not change substantially, the composition did – dismissals became more frequent relative to other forms of exit. As a result, firms may have come to expect lower average productivity among jobseekers, which in turn depressed post-separation earnings and worsened re-employment prospects for all displaced workers, regardless of the reason for their exit.
Figure 2 Treatment effects on labour market outcomes, by type of job separation
Young workers and workers in the South hit hardest
The burden of increased job loss costs was not equally shared. We find that the most negatively affected were younger workers, individuals employed in Southern Italy, full-time workers, and workers who remained in the same industry after job loss.
These patterns indicate that the reform disproportionately affected already vulnerable groups, exacerbating existing regional and generational inequalities. The reduction in reinstatement protections effectively ‘levelled down’ conditions for more secure workers, without offering substantial gains for those in precarious positions.
Policy implications: Reducing employment protection legislation is not enough
The Fornero Reform sought to reduce dualism in the Italian labour market – the divide between secure, protected jobs and precarious, temporary employment. However, reforms to employment protection can produce unintended consequences. By easing reinstatement constraints, firms found it easier to dismiss workers. This, in turn, fuelled expectations of lower average productivity among those re-entering the labour market, contributing to weaker hiring wages and lower re-employment probabilities. In practice, the reform increased the cost of job loss, particularly for younger and more vulnerable workers. Reducing labour market dualism requires more than making dismissals easier; it demands robust active labour market policies and a comprehensive social protection system. Without adequate safety nets, such reforms risk deepening existing inequalities, placing the heaviest burden on those least able to bear it.
References
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