Institutions and firms' adjustments: measuring the impact of courts' delays on job flows and productivity

Abstract

Not only is labor-market rigidity the result of legislative provisions, but it is determined by the institutional framework at large. We argue that courts’ delays in settling labor disputes affect the strictness of employment-protection legislation by increasing the expected firing costs. We exploit the variation in the length of labor trials across Italian judicial districts and the fact that the Italian legislation regarding firing prescribes different firing regimes for firms above the 15-employee threshold and provide evidence on the impact of courts’ delays on job reallocation and firms’ productivity. We show that in judicial districts with longer trials, the rate of job turnover is significantly lower. This occurs through lower rates of job destruction and, to a lesser extent, job creation. We also find a detrimental impact of courts’ delays on the labor productivity of firms above the 15-employee threshold. The effect is stronger in sectors with higher flexibility requirements.