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

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.

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.

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.