Draghi Compromise Shows Thawing Pandemic Job Market Isn’t Easy

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Italian Prime Minister Mario Draghi maintained a firing freeze in some key sectors of the economy, underscoring the difficulty in reversing emergency measures taken to protect workers during the pandemic.

While the Rome-based government was able to end a ban on job cuts in manufacturing and construction, the outcry from unions and politicians led to a compromise which will see protections extended until October for the textile, fashion and footwear industries. The firing freeze in the services sector will remain in place until October.

At the height of the pandemic, Europe's third-largest economy offered companies generous guarantees on new loans and allowed them to furlough workers at no cost for as long as 16 months. Draghi added a further three months on Wednesday.

On top of these measures, as the country went into lockdown in March 2020, Rome blocked businesses from firing staff, with former Finance Minister Roberto Gualtieri promising that “no one will lose their job because of the coronavirus.”

“Policymakers need to thread a narrow path between ensuring that viable firms retain resilience without keeping ‘zombie' firms alive and preventing a reallocation of capital to the more productive sectors of the economy,” HSBC's Simon Wells wrote in a note to clients on Wednesday.

With the economy now regaining its footing and growth expected to top 5% this year, business lobbies are calling for an end to the ban, saying it keeps them from hiring new workers and taking full advantage of the recovery.

U.S. Checks

While the U.S. sought to limit damage to workers and their families by handing out checks during the worst period of the pandemic, Europe favored shielding companies and jobs -- with Italy the only European Union member to introduce a universal ban on layoffs.

Some of the country's usually fractious political parties joined forces to push for an extension. The center-left Democrats and the anti-establishment Five Star Movement -- both supporters of Draghi's government -- put pressure on Labor Minister Andrea Orlando to protect workers. Matteo Salvini of the rightist League party, which also backs Draghi, has signaled he's open to reviewing the situation sector by sector.

“The ban was like a dam to stop an overflowing river but now it's very difficult to go back,” said Andrea Garnero, an economist at the Organization for Economic Development, currently on research leave. Whoever ends the firing freeze carries “the stigma of having taken this privilege away,” he said.

Italy was among the first to feel the economic effects of the pandemic, and it's been one of the hardest-hit European countries as well. Gross domestic product fell almost 9% last year and the government has spent over 170 billion euros ($201 billion) in stimulus so far to keep the economy afloat.

An EU report concluded that the Italian measures mostly benefit “insiders,” or workers with permanent contracts, to the detriment of temporary and seasonal workers. In addition, a comparison with other EU countries suggests that Italy's dismissal ban “was not particularly effective and proved redundant in view of the extended use of job retention schemes.”

Statistics bear out that view: some 560,000 Italian workers were still fired in 2020, compared to 870,000 the previous year.