Reforming Labor Markets in the Eurozone: Italy and France Compared

This paper uses a most similar system design by selecting two countries experiencing growing budgetary and employment problems during the Eurozone crisis: Italy and France. On the one hand, Italy, in 2012 first and in 2015 after, passed wide-ranging labor market reforms under growing pressures from the EU and international financial markets. On the other hand, France, despite similar underlying economics, did not undergo any such pressure, and in 2013 it only passed a much less incisive labor market reform. Therefore, at least initially, this is a case of divergence, as the policy outcomes are different, due to varying financial markets pressure between the two countries and different domestic political contexts: in Italy, the technocratic Monti government first, and the Renzi government after, and in France Hollande’s presidency. However, in 2016 France set out a much more daring reform, leading to convergence. Our paper investigates why France passed the most recent labor market reform despite the lack of pressure from financial markets or the ECB. More specifically, the role of diffusion from the Italian Jobs Act of 2015, the potential impact of a different type of market discipline, working through reputation rather than direct interest rate pressure, and the French attempt to buy budgetary flexibility within the European Semester are analyzed, alongside their interaction with domestic political structures and dynamics.