Italy's Tyranny of Labor Protection By Alberto Mingardi. [The Wall Street Journal Europe, June 13, 2003] French public sector workers are dreaming up new schemes for disrupting daily life, while unions in Britain, Germany and other European countries are also demanding better deals and opposing economic reforms. But the biggest battle in the struggle between government reformers and unions seeking to preserve their high level of labor market protection is taking place in Italy, where voters are preparing to go to the polls Sunday in the most important referendum in the country's recent history. The ballot is over whether to expand the range of the notorious "Article 18" of Italy's Labor Code, which allows an employee who has been fired by a company with 15 or more employees to bring a lawsuit challenging the dismissal. If the suit is successful, as is almost always the case because of the constitutional preference given workers, the employer is forced to rehire the worker and pay back wages and social insurance contributions, as well as a large fine. In practice, this makes it almost impossible for employers to fire workers. Sunday's referendum proposes to further extend the law to mom-and-pop enterprises of 15 employees or fewer. Firing employees will become virtually illegal in Italy. If the referendum passes, it is likely to embolden union movements across Europe to seek similar extremes of protection. No one doubts that the current restrictions hurt job creation in Italy. A study led by Stefano Scarpetta of the Organization for Economic Co-operation and Development found that the average American startup that survives two years increases employment by 160% in that time, while the average Italian one that survives as long increases its payroll by only 20%. Although many factors are undoubtedly at work, stiff firing restrictions clearly account for some of Italy's lower job growth. It is not by chance that the most productive areas of Italy (especially Lombardy and Veneto, in the North) are a mosaic of small businesses that do not grow larger. Allowing small companies to grow above the 15-employee threshold without being subject to Article 18 would predictably encourage entrepreneurs to hire more workers, since they wouldn't have to risk keeping them for life. But the referendum -- called by "Rifondazione Comunista" (the neo-communist party) and backed by "CGIL" (the most powerful among the Italian unions) -- is stubbornly driving in the opposite direction. Italy's center-right government of Prime Minister Silvio Berlusconi proposed only a modest reform to Article 18 this past year. For a trial period of three years, small companies that grew beyond 15 employees would be exempted from the stringent restrictions. Yet even these modest proposals ran into a buzz-saw of union and leftist opposition. Marco Biagi, a socialist lawyer who worked as an advisor to Italy's labor ministry, was assassinated in March 2002 by the "Red Brigades," a left-wing terrorist outfit that could not forgive him for supporting increased labor flexibility. In April 2002, unions staged the largest general strike in 20 years, all but dooming the reforms for now. The immense influence of Italian unions is partly grounded in public support. But Italian free-marketers have allowed the unions and the parties backing them to seize the moral high ground, monopolizing the magic words "justice" and "morality." And when they set the terms of the debate, they usually win. Italy's reformers have shown no aptitude for stressing the morality of the market system and the importance of individual freedom. Rather, reformers stick to factually correct but dully technical economic arguments about the costs of the current restrictions. For the average Italian voter, choosing between "marginal occupation increment rates" and "social justice" isn't a tough call. Mr. Berlusconi, a master of political communication in other fields, has clearly failed to make his case for a reform that more than anything will determine the success of his tenure as prime minister. Even eliminating Article 18 -- which isn't in question here -- would do little to change the distortions in Italy's labor markets. Five articles of the Constitution are explicitly dedicated to safeguarding workers' rights. Article 36, in particular, aims to guarantee a "just salary" to every employee, in addition to giving the state the power to decide the length of working weeks and holiday periods. This whole set of rules rests upon the prejudice that the relationship between an employer and his employees is intrinsically asymmetrical and coercive. Workers are seen as inherently weaker and deserving of powerful protective legislation. Bruno Leoni, the prominent law scholar who wrote "Freedom and the Law" (the 1961 book which changed F.A. Hayek's mind on the subject), explained the fallacies of such an approach to labor regulation in the 1960s. There is no reason, Leoni pointed out, to believe that employers are always the "stronger" and employees are always the "weaker" players. When an entrepreneur needs workers, and cannot find them easily, he is weaker: He needs them more than they need him. The freedom to strike, Leoni argued, cannot be considered a "right" unless you make an exception to the general law by which contracts ought to be respected. The power of the trade unions is still grounded upon this exception. An effective reform of the labor market, in Italy, can be accomplished only as a corollary to a larger constitutional reform. It is not a matter of robbing workers of their rights: it is a question of making it possible for contracts to be enforced. That is true social justice.