Institutions and firms Adjustments: Measuring the Impact of Courts' Delays on Job flows and Productivity
Abstract: Labour market rigidity is not only the result of legislative provisions, but it is determined by the institutional framework at large. We argue that courts’ delays in settling labour disputes affect the actual strictness of employment protection legislation by increasing the expected firing costs. We exploit the variation in the length of labour trial across Italian judicial districts and the fact that the Italian firing legislation prescribes different (firing) regimes for firms above the 15-employees threshold in order to provide evidence on the impact of courts’ delays on job reallocation and firms’ productivity. We show that in those judicial districts with longer trials, job turnover is significantly lower. This occurs through lower job destruction and, to a less extent, job creation. We also find a detrimental impact of courts’ delays on labour productivity of firms above the 15-employees threshold. Such effect is stronger in sectors with a higher flexibility requirement.