By JANAE MARTIN
BOLOGNA — Last week, as the Italian unemployment rate fell from a record high of 13.3 percent, the country’s economic prospects are finally looking hopeful in light of a lower euro, lower oil prices, and monetary stimulus from the European Central Bank. This news is adding momentum to Italian Prime Minister Matteo Renzi’s series of financial reforms.
One advisor in Renzi’s ranks is Professor Filippo Taddei, who by day is an assistant professor of economics at Johns Hopkins University SAIS, and by night, the lead economic advisor to the secretary of the Italian Democratic Party (PD), which is Renzi himself. The SAIS Observer sat down with Taddei to discuss the unemployment rate, growing disillusion with Renzi’s reforms, Taddei’s personal security, and Italy’s labor reforms and public perceptions.
How did you get into the policymaking role?
Well like most things in life, it’s a combination of commitment, application, and luck. I’m a research economist, but I’ve always had a specific interest in the details of the implementation of economic policymaking, which has to do with politics, of course. SAIS provides an optimal environment if you’re interested in the interaction of between the design of policy and the implementation of policy through politics. What happened was, because of that interested I had, I was more involved in Italian politics, and the new prime minister came out and thought it would be a good idea to have me as one of his economic advisors, in particular the person responsible for the economic and labor agenda.
How were you involved in politics before Renzi approached you?
Just on a voluntary basis. I cared about participating in public debate: I thought it was my professional duty to do my best to raise the level of the public debates regarding economic policymaking in Italy. So you write in the newspaper, you write an essay…It was maybe a bit more than a hobby, an extended hobby, something that you do on the side in addition to your actual research and teaching. Because of the things I promoted and said in the essays, I singled myself out, and the opportunity came my way. This is an unexpected place for me, but it’s very interesting because it’s the natural application of what I do, what I care about, and what I study.
What do you think specifically caught Renzi’s, or his people’s, attention about the ideas you promoted in these debates?
Well, possibly the ability to combine some sort of technical precision with clear explanation, which is what public policy’s about. What we try to do here is to train you to learn things and to form your own perspective, but when you get to public policy debate, you have to be able to communicate your ideas in a palatable way, in a way that can be understood. This ability is pretty important for a policymaker: a solid understanding of the trade-offs of where you want to move society and the economy and the ability to explain it, convince people.
And what are some of the reforms you’re developing?
Italy has had a very extended public debate regarding its major inefficiency. We could call it the structural deficits of the economy, and the debate has been going on for many years, almost twenty years. Changes, structural reforms, deep reforms have been very weak. That’s the truth. So, what is going on now is a clear acceleration in the pace of reform.
Italy is the country that has not very effective public administration and a level of corruption that is higher than you would expect from an advanced economy. In addition to that, you have a tax system that is very unfavorable to the factors of production, to whoever wants to bet on his or her job, on whoever wants to invest. Our tax system is very averse to risk-takers or people who want to empower themselves through their job, which is the main trigger of social mobility. If you work, if you want to invest and build a company, the tax system in Italy would be the most detrimental to you.
You have a variety of measures to prove that. The most important one is the amount of tax revenue that comes from taxing individuals and firms in this country, which is the highest of all: the U.S., Germany, Italy, France, you name it. So that tells you that our tax system does not go in the direction of changing the economy or preserving the economy. That is something peculiar to the Italian economy that everybody, more or less, agreed upon, but nobody made the change. We have two percentage points of GDP that we extract from individuals and firms in this country compared to any other advanced economy. Two percentage points of GDP is a lot of revenue, so we are correcting that structural deficit.
The other issue with the Italian economy has to do with the peculiar structure of our labor market. The Italian labor market is the most fragmented and segmented of all. The labor market is split in two, between the people with permanent contracts and some sort of protection and people without. It’s the Wild West: a bunch of very different contracts and the misuse and abuse of flexibility. As a consequence of that, there is very little human capital in the equation. If you think about it, you as a worker invest in your job if you think there are some prospects in your job. But if you know that today you’re here, and in a few weeks you’ll be elsewhere, why take the trouble and make a strategic investment? That translates into very little human capital. So we’re changing net wealth by reinventing the old system in favor of stable employment.
We’re supporting stable employment by providing a fiscal tax subsidy, fiscal incentives, contractual incentives. We’re changing the contractual structure of the Italian labor market and the structure of our unemployment subsidy. Right now, a lot of the support that unemployed Italian people get is linked to the firm. So I do not support you as a worker losing your job; I support you because I want to support your company. Because I care about the company, I indirectly support you as the employee. That creates a lot of strange incentives: really, they’re abusive. So what we’re saying is that if we care about the worker, we support the worker directly. We give them unemployment subsidies that are more universal so they cover more people out there. You’d be surprised by how many Italian workers were completely without any support scheme in case of unemployment: a couple million workers in a country where you have 22.5 million people working. So we’re taking a good million of these and bringing them into an unemployment subsidy. Of course, I’m asking workers to take a risk – I’m asking them to gamble – but if things don’t go their way, I’m providing a safety net. It’s a sharing of risk: if you encourage people to invest in themselves and take a risk, you don’t leave them alone when things don’t go well.
There are some workers who believe that the labor reforms could allow employers to dismiss employees without any reason and without any repercussions, due to amendments to Article 18. How would you convince these people that your policies are actually stabilizing the labor market?
What they fear is already happening. In Italy, abusive employers, people with little attention for the future of the country or the welfare of the workers, get by with these fictitious contracts. I’ll give you an example. Technically speaking, because of the way the Italian government is shaped, I am a consultant of Johns Hopkins. But I’m not a consultant: I’m an assistant professor here under a standard tenure-track system. If Johns Hopkins is happy, they will give me tenure at some point. If they are not happy, they will not give me tenure. That is the international standard. But I get hired as a consultant. It’s not a problem for me because I get paid a salary, I work in this beautiful place, everyone is comparative here, everything is fine. But think about all the other workers in Italy where that doesn’t happen. People like me that are employees in an economic sense (economically dependent on an employer with a job organized by their employer) their salary is fully-liberalized. They can be paid anything. Their job is fully-organized by their employers, while they have none of the rights employees have. Why? Because they are hired as cocopro, a consultant hired on a coordinated and continuative basis. It’s really a joke. Some of these people are truly consultants, but a vast majority are employees and are not treated as employees. This is the system right now. So I say, you understand that this is abusive – it is abusive – let’s take these people and hire them for what they are. If they are employees, hire them under the standard employment contract, like anyone else.
Since firms are concerned about the beginning of an employment relationship, the trust relationship must be built; the match must be solidified. Right now the Italian system says, “When the match is formed, do whatever you want.” Let’s put some order there. You hire people, give them a chance. If things work out, keep them there. If things don’t work out, it was your responsibility as an entrepreneur to hire the right person. Compensate that worker based on the seniority of that worker. Done. They are both sharing risk. The entrepreneur is taking some risk because he’s hiring one person over somebody else, and if the employer makes a mistake, he compensates the employee. Right now there is nothing of that. So we wonder, How can we say that the new system is weaker on the protection of employees then the current system?
Speaking to some Italian voters, they seem to view Renzi’s policies as a betrayal. They thought he would be implementing more socialist policies and now believe he has pro-market leanings.
Well, I think we have the most dual labor market of all, one that is most openly discriminatory to people. There is a very large difference between the things we say and the things we do in this country. We say that all workers are equal, that they should have the same rights, and then we allow them to be hired with absolutely crazy contracts. We give them no rights no protection whatsoever. So I wonder, if you have a segment that is the very weakest of your population, that gets very questionable labor contracts while they work, that get no protection or unemployment subsidy if they lose their job, that get no active labor market policies directed to help them change their skills or apply their skills – if you talk to these people who are the weakest of your labor force and to all these people you provide compensation, the unemployment subsidy that they were not entitled to receive before – I wonder is this pro-market, or is this social?
I think this is a very equitable reform in terms of restoring the common condition. Then, for once, by doing something equitable, we also do something pro-market. We know that when people are in a stable contract, they typically accommodate human capital. They become more professionalized. They require skills that make them stronger workers, more robust to the shocks and better able to find new jobs. I understand that may be controversial. It’s a major shift in the public policies in Italy, but precisely because this is a country that doesn’t take care of the last. We try to take care of the last, and if we succeed in bringing these people in, we’re increasing equality and efficiency. By the way, the labor market system we’re adopting here is not different from the Swedish one, or the British one, or the Spanish one. And I don’t think we’d say Spain, Britain, or Sweden are pro-market or inattentive to social issues.
People who disagree with you have been directing their frustrations toward you personally. I was wondering if you want to speak on some of the negative consequences of being a prominent figure in this reform initiative?
Look, if you want to get into policymaking, you have to understand that you’re always addressing interests, legitimate interests. Some people are very sensitive about their own interests, and they perceive that touching their interests is inadmissible.
What happened in the Italian labor market is that we have this culture of “job property”: an employee owns his or her job. If a job is taken away from you, you have the right to get it back. Philosophically, that comes from Fordism, where we are all people working on a chain. Your job is there; you’re doing this repetitive, manual job, and there’s no reason you should be fired unless the company shuts down. Now we know that modern jobs in modern economies work like this: a worker comes, he performs some tasks, and, as a consequence of those tasks, a trust relationship is built. If the trust relationship is broken, for whatever reason, it is not openly abusive to fire a person. If I fire you because I don’t like you, because of your race, your gender, your religious beliefs or political background, of course, you have the right to get your job back. If the trust relationship is broken, the worker gets a compensation, but you wouldn’t force two newlyweds to live together if they don’t want to. If the marriage doesn’t work, the stronger party compensates the weaker party, but you don’t force them to live in the same house.
Well, some people feel that this is a frontal attack on their right to own their job. If you feel that I take away something that is yours, well not everyone is educated enough to react to that pressure in a rational way. Unfortunately, this country, on this point, had a few examples in the past of people that paid with their life just for making the point that I just made. The bottom line is that if you believe in something, you take responsibility. You accept the consequences. Sometimes the consequences are unwarranted, things that you would have rather avoided. At the end of the day, it’s about what you want to do in life. Nobody asks you to do anything; you do it yourself.