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The kids are not all right: labour market flexibility, inequality and Covid-19

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02 February 2021
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Mind the income gap. - © Suad Kamardeen on Unsplash

Young people and low-skilled workers are more exposed to the coronavirus and suffer the most severe consequences than their older counterparts, including in terms of income. This is partly due to the deregulation of the labour market, which has made wage trajectories unequal among generations of workers.

Since the second half of the 1980s, many European countries have undertaken a set of reform processes in order to make their labour markets more flexible. These reform patterns have differed across countries in intensity and type of deregulation, leading to a rather heterogeneous set of country-related outcomes. Rigid labour markets were seen as a major cause of limited growth or economic stagnation depending on the country. In southern Europe especially, this process has been identified as one of the main drivers of inequality over the last 30 years. In this framework, Italy seems to be an interesting country since, during this time, it has experienced severe tumultuous deregulation attempts and growing inequality in a set of high employment protection and high unionisation (OECD Indicators of Employment Protection, Berton et al.2012).

The deregulation process was carried out through a set of reforms introduced between the mid-1990s and the mid-2000s. The aim was to weaken Employment Protection Legislation (EPL) and reduce the time it took for young people to enter the labour market, thereby reducing youth unemployment and improving younger worker's prospects. The observed result was the facilitation of opportunities to hire employees on a temporary basis and the introduction and liberalisation of atypical contractual arrangements. Contrary to what was expected, several studies highlighted the creation of a dual or two-tier labour market, divided between a reformed and an unreformed segment (Boeri, 2011; Berton and Richiardi, 2012; Ordine and Rose, 2015).

In Italy, between 1985-2018, inequality increased slightly, showing an unusual dynamic: while average compensations broadly stagnated throughout the 90s, entry wages fell. Falling entry wages were not followed by faster, or at least similar, subsequent wage growth, which as a result led to an increase in wage gaps among younger cohorts. Instability of initial wage growth could also be related to the business cycle, with weaker dynamics for those who entered during a recession, but this cannot entirely explain the deceleration of wage growth experienced by all new entrants after the mid-90s. In my thesis, I argue that this increasing fragmentation of work experiences for new entrants is the key explanatory factor that links labour market reforms and the income gap, and increases earning instability among subsequent workers' cohorts. For new entrants, inequality and instability are seen as a direct outcome of the extensive use of non-standard contracts.

Results show how new entrants exhibit higher income differentials and higher income instability than counterparts who have been in employment for longer terms. This pattern increases if, over the life cycle, the number of non-standard episodes is taken into account. It is also substantially pronounced for workers born after 1980: precisely for the cohorts who entered during the reform period. The number of atypical contracts over a career increases wage differentials and instability, and it is indicative of the role played by the reforms at the margin in shaping income distribution and reducing income mobility among younger cohorts.

In sum, workers are more likely to be poor or struggling and in the bottom 40 % of the income distribution mentioned by the OECD (2018) if they have non-standard jobs. This might not be so important if such a job is a steppingstone to a better one in the future, but too often, this is not the case. Excessive wage differentials associated with temporary jobs contribute to wider inequality. In addition, temporary contracts reduce firms' investments in human capital and skill development, precisely the aspects that can improve firm productivity and boost economic growth on the aggregate level. Ensuring that different employment arrangements meet both employee and employer interests is one way of ensuring that equality and growth move hand-in-hand and avoid the creation of a system of "good" and "bad" jobs.

The pandemic crisis fits into an already compromised situation, worsening the working conditions of the low-skilled workforce and exposing them to greater risks of contagion.

Alessio Tomelleri

For a long time, this issue was side-lined from the political agenda of various European governments, including Italy's. With the advent of Covid-19, the relevance of income inequality and income inequality is back in the news. The pandemic can exacerbate the generational aspect of income inequality described before. Covid-19 is creating a grossly unequal impact on young and unskilled workers, worsening what the deregulation did in the past. Many of the workers losing their jobs or those whose jobs are at stake, come from service sectors typically insulated from large cyclical swings, such as restaurants, personal services or retail. They tend to be younger, less educated and are more likely to be female (Watcher, 2020).

At the same time, other low-skilled jobs, such as those in the manufacturing and food sectors, are not able to be undertaken remotely, resulting in an increase in the likelihood of being infected due to the necessity of proximity to others. Spells of unemployment and prolonged periods of illness permanently affect young and low-skilled workers' career trajectories, exacerbating the ongoing dynamic of wage differentials between old incumbents and young new entrants. If this is the case, it is very likely that there will be an increase in inequality in the long-term and a consequent reduction in social mobility.

If action is not taken quickly, there is a risk of exacerbating income inequality within society. I am not just referring to the top 1 % of income distribution mentioned by Piketty, but also to the vast majority of incomes which fall below the median of the distribution. Besides having long-term repercussions in terms of both social mobility and opportunity, high levels of inequality undoubtedly lead to increased political instability, resulting in protests and forms of civil disobedience, not to mention outright violence.

Reducing labour costs to stimulate investment by companies in order to revitalise the economy has been an unsuccessful strategy for southern European countries, especially since deregulation has hit the non-standard contract segment much harder. The pandemic crisis fits into an already compromised situation, worsening the working conditions of the low-skilled workforce and exposing them to greater risks of contagion.

It is precisely in these moments that there is an opportunity to change the status quo, reviewing the flexicurity scheme and managing the mechanism of incentives and guarantees present in non-standard contracts, especially the atypical ones more wisely. Something which policymakers should think about.

References

  • Alesina, A. and Rodrik, D. (1994). Distributive politics and economic growth. The quarterly journal of economics, 109(2):465–490

  • Ballarino, G., Braga, M., Bratti, D. C., Filippin, A., Fiorio, C., Leonardi, M., Meschi, E., and Scervini, F. (2014). Chapter 16 italy: How labour market policies can foster earnings inequality. Changing Inequalities and Societal Impacts in Rich Countries: Thirty Countries' Experiences, page 369.

  • Berton, F., Richiardi, M., and Sacchi, S. (2012). The political economy of work security and flexibility: Italy in comparative perspective / Fabio Berton, Matteo Richiardi and Stefano Sacchi. Policy, Bristol.

  • Boeri, T. et al. (2011). Institutional reforms and dualism in european labor markets. Handbook of labor economics, 4(Part B):1173–1236.

  • OECD (2015). In It Together: Why Less Inequality Benefits All. OECD publishing.

  • OECD (2018). OECD Regions and Cities at a Glance 2018. OECD publishing.

  • Ordine, P. and Rose, G. (2016). Two-tier labor market reform and entry wage of protected workers: evidence from italy. Empirical Economics, 51(1):339–362.

  • Ostry, M. J. D., Berg, M. A., and Tsangarides, M. C. G. (2014). Redistribution, inequality, and growth. International Monetary Fund.

  • von Wachter, Till. "Lost generations: long‐term effects of the COVID‐19 crisis on job losers and labour market entrants, and options for policy." Fiscal Studies 41.3 (2020): 549-590.

  • Tomelleri, Alessio. The Role of Temporary Jobs in Explaining Increasing Inequality for Recent Cohorts in Italy. No. BEMPS71. Faculty of Economics and Management at the Free University of Bozen, 2020.

  • Wilkinson, R. and Pickett, K. (2010). The spirit level. Why equality is better for everyone.

Alessio Tomelleri

Alessio Tomelleri is an economist, sociologist and data analyst. He joined the Center for Advanced Studies of Eurac Research in October 2020, after delivering his PhD thesis. In addition to his PhD, he worked at the Institute for Economic Research (IER) of the Chamber of Commerce of Bolzano for six years. His main research interests concern labour and regional economics, inequality, and statistical methods. More precisely, he is working on identifying the effects of inequality and institutional changes on economic growth, addressing the issue from a regional perspective.

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  • Labour
  • labour law

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