Italy Wrestles With Rewriting Its Stifling Labor Laws
ROME — Micaela Pallini stood amid the heady perfume of anise-scented sambuca in the Roman distillery run by her family for five generations and pointed to a gleaming row of bottles rolling off a packaging line.
She recently had a chance to double production of the popular Italian liqueur and expand the reach of the 137-year-old company by hiring more people for a joint venture with an Italian partner.
“But we didn’t pursue it,” said Ms. Pallini, the chief executive of Pallini liquors, which sells spirits including sambuca and limoncello worldwide. “If the venture failed, Italian laws make it almost impossible to cut our work force to adjust costs,” she said. “It’s a risk we couldn’t afford to take.”
As Italy teeters on the edge of Europe’s debt crisis, its notoriously rigid labor market has become a lightning rod for the nation’s fiscal and economic problems. The economy is mired in a long recession, and unemployment is stuck at above 10 percent, in large part because thousands of small companies like Pallini face seemingly insurmountable hurdles to growth.
Prime Minister Mario Monti is tackling the issue head on, a challenge in a country beset by corruption, stifling bureaucracy and a lumbering judicial system whose rulings in labor cases often lean toward keeping people in their jobs for life. After a caustic battle with Italy’s powerful unions, Mr. Monti in the spring pushed through measures meant to help the economy by creating incentives for businesses to hire — in part by also making it easier to shrink work forces in times of economic distress.
The overhaul has been welcomed by employers and could not come at a more pivotal time for Italy. The economy, the euro zone’s largest after those of Germany and France, is still among the world’s richest in terms of net household wealth. But the International Monetary Fund has forecast only a slow recovery for Italy if the policy changes are not adopted. The Italian government’s debt load is second only to Greece’s, at 120 percent of gross domestic product, and the I.M.F. expects it to rise to 125 percent this year.
Italy also faces a more imminent danger: as the euro crisis has spread to the region’s other troubled big economy, Spain, investors have frequently driven Italy’s borrowing costs above 6 percent amid fears that Rome may eventually have to ask for financial help from its European partners.
While labor market overhauls can help, economists say it is not certain that they will stoke growth fast enough to mend Italy’s finances.
“We are still far from providing an overall new design of Italian labor market institutions,” Luca Nunziata, a professor of economics at the University of Padua, wrote in a recent report for CESifo, an economic research group. The question, he said, is whether the reforms “can put the country back on track.”
Real growth could also depend on unleashing the potential of small businesses like Pallini. In many ways the company, founded in 1875, represents the face of Italian business. While the “made in Italy” label is trumpeted with big-brand icons like Ferrari, Gucci or Barilla, the backbone of the economy is the smaller businesses like Ms. Pallini’s that employ 10 to 30 people. Often, the companies have been in the family for generations.
After World War I, a Pallini boutique was set up next to the Pantheon. In the 1960s, Ms. Pallini’s father, Virgilio, expanded into a more modern factory on the industrial outskirts of the city, where the company still makes its spirits. Today, 26 people are involved in the production and sale of Pallini’s two top products, sambuca romana and limoncello, to export markets in the United States and Europe. The privately held company had 10 million euros, or $12.3 million, in revenue last year.
On a recent afternoon, workers slipped bottles of limoncello into boxes adorned with a florid lemon-tree print, and wrapped plastic around cases of liqueur bound for Belgium. A chemist inspected a batch of peach alcohol used in bars worldwide for Bellini cocktails, while a machine measured cinnamon, elder flower and cardamom destined to infuse a giant vat of sambuca.
But the Pallini dream of taking the business to greater scale and profitability has met with obstacles. For one, labor costs are prohibitively high, because of an array of taxes that mostly go toward supporting Italy’s lumbering government and an extensive social safety net. Wages are set through collective bargaining. For an average worker with net take-home pay of 1,100 euros a month, Ms. Pallini said, the total cost to her company, including taxes and social charges, is 2,500 euros.
Those costs have risen as the European crisis deepens, she added, because the level of taxes she pays for pensions depends on the health of public finances, which have deteriorated rapidly. Adding a new production shift, she said, “would mean such a high cost of manpower that we would not be able to compete.”
What is more, letting go of underperforming workers can often take up to three years and incur high legal costs. Employees often file lawsuits to fight dismissals, and in many cases judges rule for their reinstatement. In the meantime, the worker continues to be paid. Ms. Pallini cited a two-year trial in which a judge reinstated a grocery store employee who stole 80 euros ($98) after concluding that the employee should not lose his job over such a small amount.
In Ms. Pallini’s own factory, an employee suspected of stealing had to be watched for two years before being caught in the act. Videotape that had captured his thefts was not admissible in court, so her father and two employees had to spend countless hours gathering watertight evidence to ensure that judges would not eventually reinstate the man. By contrast, a private sector employer in the United States could have terminated the worker as soon as a theft was detected, unless a union contract was involved or antidiscrimination laws were violated.
In another instance, Ms. Pallini said Italian labor laws allowed an unproductive worker to exercise his option of working three years beyond retirement age, even though the employee was slow and unable to operate some crucial machinery. “During that period we would have rather hired someone new and dynamic,” she said, “but we couldn’t because it was too costly to just add another person to the payroll.”
Mr. Pallini, her father, is heartened that Mr. Monti is making it easier for businesses to reduce their work forces if shrinking growth imperils them. But he is waiting to see how the new law will be applied, especially as the faltering global economy weighs on sales.
People are drinking more wine and cutting out expensive cordials in overseas markets where Pallini exports about 85 percent of its products, he said. But while there are less expensive rivals, Mr. Pallini is resisting cutting corners. For instance, for its limoncello the family continues an age-old tradition of using large sfusato lemons grown on the sunny Amalfi Coast, which must be handpicked and lugged up steep hills. “That costs money,” he said.
All the equipment in their factory is made in Italy, he pointed out proudly. Costs could be reduced by outsourcing distillation to Asia, Mr. Pallini said. “But that is what’s killing the Italian economy,” he said.
In the meantime, as father and daughter think of ways to grow, the financial crisis is constantly on their minds. They are stashing away capital reserves to avoid relying on banks for any expansion.
“Loans are very expensive now, and they are getting higher as the spreads on Italian debt rise,” said Mr. Pallini, citing commercial interest rates of 7 to 10 percent. Several Italian customers are in dire financial straits, he added, “because banks are spending money to buy government debt instead of lending to business.” Pallini has stopped supplying those customers lest he not be paid.
The credit squeeze puts Italian businesses “at a huge disadvantage to German merchants who are getting financing at 2 percent,” his daughter added. “It shows how Italy’s huge debt is really being paid for by everyone.”
Italy is still much better off than Spain or Greece, Mr. Pallini insisted. But since the financial world seems to dictate the course of countries these days, they are wary about the future.
“It’s really dangerous now that we are letting markets dictate the policies of entire economies,” Ms. Pallini said. “They drive governments in a panic to cut funding for schools, culture, health care — and my children’s future.”
Her father, meantime, says he is confident about Italy. “But I don’t know if I’m confident about Europe,” he said.
ROME — Micaela Pallini stood amid the heady perfume of anise-scented sambuca in the Roman distillery run by her family for five generations and pointed to a gleaming row of bottles rolling off a packaging line.
She recently had a chance to double production of the popular Italian liqueur and expand the reach of the 137-year-old company by hiring more people for a joint venture with an Italian partner.
“But we didn’t pursue it,” said Ms. Pallini, the chief executive of Pallini liquors, which sells spirits including sambuca and limoncello worldwide. “If the venture failed, Italian laws make it almost impossible to cut our work force to adjust costs,” she said. “It’s a risk we couldn’t afford to take.”
As Italy teeters on the edge of Europe’s debt crisis, its notoriously rigid labor market has become a lightning rod for the nation’s fiscal and economic problems. The economy is mired in a long recession, and unemployment is stuck at above 10 percent, in large part because thousands of small companies like Pallini face seemingly insurmountable hurdles to growth.
Prime Minister Mario Monti is tackling the issue head on, a challenge in a country beset by corruption, stifling bureaucracy and a lumbering judicial system whose rulings in labor cases often lean toward keeping people in their jobs for life. After a caustic battle with Italy’s powerful unions, Mr. Monti in the spring pushed through measures meant to help the economy by creating incentives for businesses to hire — in part by also making it easier to shrink work forces in times of economic distress.
The overhaul has been welcomed by employers and could not come at a more pivotal time for Italy. The economy, the euro zone’s largest after those of Germany and France, is still among the world’s richest in terms of net household wealth. But the International Monetary Fund has forecast only a slow recovery for Italy if the policy changes are not adopted. The Italian government’s debt load is second only to Greece’s, at 120 percent of gross domestic product, and the I.M.F. expects it to rise to 125 percent this year.
Italy also faces a more imminent danger: as the euro crisis has spread to the region’s other troubled big economy, Spain, investors have frequently driven Italy’s borrowing costs above 6 percent amid fears that Rome may eventually have to ask for financial help from its European partners.
While labor market overhauls can help, economists say it is not certain that they will stoke growth fast enough to mend Italy’s finances.
“We are still far from providing an overall new design of Italian labor market institutions,” Luca Nunziata, a professor of economics at the University of Padua, wrote in a recent report for CESifo, an economic research group. The question, he said, is whether the reforms “can put the country back on track.”
Real growth could also depend on unleashing the potential of small businesses like Pallini. In many ways the company, founded in 1875, represents the face of Italian business. While the “made in Italy” label is trumpeted with big-brand icons like Ferrari, Gucci or Barilla, the backbone of the economy is the smaller businesses like Ms. Pallini’s that employ 10 to 30 people. Often, the companies have been in the family for generations.
After World War I, a Pallini boutique was set up next to the Pantheon. In the 1960s, Ms. Pallini’s father, Virgilio, expanded into a more modern factory on the industrial outskirts of the city, where the company still makes its spirits. Today, 26 people are involved in the production and sale of Pallini’s two top products, sambuca romana and limoncello, to export markets in the United States and Europe. The privately held company had 10 million euros, or $12.3 million, in revenue last year.
On a recent afternoon, workers slipped bottles of limoncello into boxes adorned with a florid lemon-tree print, and wrapped plastic around cases of liqueur bound for Belgium. A chemist inspected a batch of peach alcohol used in bars worldwide for Bellini cocktails, while a machine measured cinnamon, elder flower and cardamom destined to infuse a giant vat of sambuca.
But the Pallini dream of taking the business to greater scale and profitability has met with obstacles. For one, labor costs are prohibitively high, because of an array of taxes that mostly go toward supporting Italy’s lumbering government and an extensive social safety net. Wages are set through collective bargaining. For an average worker with net take-home pay of 1,100 euros a month, Ms. Pallini said, the total cost to her company, including taxes and social charges, is 2,500 euros.
Those costs have risen as the European crisis deepens, she added, because the level of taxes she pays for pensions depends on the health of public finances, which have deteriorated rapidly. Adding a new production shift, she said, “would mean such a high cost of manpower that we would not be able to compete.”
What is more, letting go of underperforming workers can often take up to three years and incur high legal costs. Employees often file lawsuits to fight dismissals, and in many cases judges rule for their reinstatement. In the meantime, the worker continues to be paid. Ms. Pallini cited a two-year trial in which a judge reinstated a grocery store employee who stole 80 euros ($98) after concluding that the employee should not lose his job over such a small amount.
In Ms. Pallini’s own factory, an employee suspected of stealing had to be watched for two years before being caught in the act. Videotape that had captured his thefts was not admissible in court, so her father and two employees had to spend countless hours gathering watertight evidence to ensure that judges would not eventually reinstate the man. By contrast, a private sector employer in the United States could have terminated the worker as soon as a theft was detected, unless a union contract was involved or antidiscrimination laws were violated.
In another instance, Ms. Pallini said Italian labor laws allowed an unproductive worker to exercise his option of working three years beyond retirement age, even though the employee was slow and unable to operate some crucial machinery. “During that period we would have rather hired someone new and dynamic,” she said, “but we couldn’t because it was too costly to just add another person to the payroll.”
Mr. Pallini, her father, is heartened that Mr. Monti is making it easier for businesses to reduce their work forces if shrinking growth imperils them. But he is waiting to see how the new law will be applied, especially as the faltering global economy weighs on sales.
People are drinking more wine and cutting out expensive cordials in overseas markets where Pallini exports about 85 percent of its products, he said. But while there are less expensive rivals, Mr. Pallini is resisting cutting corners. For instance, for its limoncello the family continues an age-old tradition of using large sfusato lemons grown on the sunny Amalfi Coast, which must be handpicked and lugged up steep hills. “That costs money,” he said.
All the equipment in their factory is made in Italy, he pointed out proudly. Costs could be reduced by outsourcing distillation to Asia, Mr. Pallini said. “But that is what’s killing the Italian economy,” he said.
In the meantime, as father and daughter think of ways to grow, the financial crisis is constantly on their minds. They are stashing away capital reserves to avoid relying on banks for any expansion.
“Loans are very expensive now, and they are getting higher as the spreads on Italian debt rise,” said Mr. Pallini, citing commercial interest rates of 7 to 10 percent. Several Italian customers are in dire financial straits, he added, “because banks are spending money to buy government debt instead of lending to business.” Pallini has stopped supplying those customers lest he not be paid.
The credit squeeze puts Italian businesses “at a huge disadvantage to German merchants who are getting financing at 2 percent,” his daughter added. “It shows how Italy’s huge debt is really being paid for by everyone.”
Italy is still much better off than Spain or Greece, Mr. Pallini insisted. But since the financial world seems to dictate the course of countries these days, they are wary about the future.
“It’s really dangerous now that we are letting markets dictate the policies of entire economies,” Ms. Pallini said. “They drive governments in a panic to cut funding for schools, culture, health care — and my children’s future.”
Her father, meantime, says he is confident about Italy. “But I don’t know if I’m confident about Europe,” he said.
