The Response to Shocks

A STUDY ON THE SECTOR CRISES AND THE PROPENSITY OF COMPANIES TO RESORT TO EARLY RETIREMENT TO COPE WITH THEM HELPS US TO UNDERSTAND WHAT COULD HAPPEN IN ITALY WHEN THE REDUNDANCY BLOCK INTRODUCED TO STEM THE CRISIS GENERATED BY THE PANDEMIC IS LIFTED

by Vincenzo Galasso, full professor at Department of social and political sciences

Besides its unprecedented health consequences worldwide, the COVID-19 pandemic has had equally dramatic economic effects. During the initial months of the pandemic, the global supply chain was slowed down or interrupted in many sectors. In others, the strict lockdown implemented in some countries largely collapsed the demand of goods and services. In some sectors, such as for instance tourism, travelling and live entertainment, the economy recovery is still far and uncertain.
The COVID-19 pandemic has clearly represented a sectorial shock – hitting firms according to their sector and regardless of their productivity. A large debate is taking place on the temporary or permanent nature of this shock. Will business travels go back to their usual level? Or will they be substituted by online meetings? Airlines, hotel chains and car rental companies are holding their breath.
Sectorial shocks force several adjustments. Restructuring processes typically affect the labor demand, as firms may need to modify their labor force composition. The COVID-19 shock will be no different. A recent paper, published in the International Tax and Public Finance, shows that firms are keen to exploit retirement programs to adjust their labor force after a sectorial shock.

This study analyses the introduction of bilateral trade agreements between Switzerland and the EU, which enhanced foreign market access for some Swiss firms. Trade liberalization episodes are known to induce important reallocation effects. Improved access to foreign markets leads existing and newly created firms to exploit this new opportunity to improve their competitiveness. Firms may choose to undergo a restructuring process that modifies their labor demand. Typically, firms seek more skilled workers and may dismiss elderly workers, who show skill obsolescence and lower adaptability.
The EU-Switzerland Bilateral Agreements I, signed in 1999 and implemented in 2020, included a mutual recognition agreement (MRA), which reduced technical barriers to trade between Switzerland and the EU. The MRA introduced the mutual recognition of conformity assessments of standards, such as certificates, tests, product authorizations, across a wide range of industrial products, thereby simplifying procedures and reducing costs for producers in both markets. However, the agreement did not affect all the industries in the manufacturing sector, but only those typically covered by conformity agreements, because of compatibility or interoperability requirements, such as telecoms equipment, good manufacturing practices for medicines and electronic goods.

Since only firms operating in the sectors covered by the MRA gained a more simplified and less costly access to the EU market, it was possible to compare the organizational behavior of these firms with that of firms in sectors not covered by agreement. The empirical evidence shows that firms in the affected manufacturing industries began to adjust their labor force immediately after the announcement of the agreement in 1999. They mostly exploited early retirement programs. Elderly workers in these industries were 7 percentage points more likely to retire early, which corresponds to 49 thousand more retirees over an elderly population (aged 56–64) of almost 700 thousand individuals. Responding to economic incentives, these adjustments were more pronounced in large firms, in exporting firms and in firms featuring large wage differences between young and elderly workers.
Despite the different nature of the sectorial shock, the findings from this study may help us understand the adjustments that lie ahead for many firms, especially in Italy. So far, employment has dropped almost exclusively for the expiration – and the lack of renewal – of temporary contracts. When the block of the dismissal will be lifted, new labor force adjustments will take place and early retirements will be on demand.