Labor market regulations and firm adjustments in skill demand

Bottasso, Anna;Bratti, Massimiliano;Cardullo, Gabriele;Conti, Maurizio;Sulis, Giovanni

2025-01-01

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Abstract

We study how changes in labor market regulations may trigger firm adjustments in skill demand. Leveraging rich administrative data from Italy, we investigate the effects of a reform that, to increase job stability, reduced the firing costs for permanent employees and tightened the regulation of fixed-term contracts. Using a difference-in-differences (DID) design, we document that the reform had unintended effects, inducing firms to increase layoffs of low-skilled (LS) permanent employees and reduce hires of LS workers on fixed-term contracts. However, the reform had no effect on high-skilled workers or permanent hires. A theoretical search and matching model with heterogeneous skills and contract durations makes sense of our main findings.