No. 471 - Tax credit policy and firms behaviour: the case of subsidies to open-end labour contracts in Italy

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by Piero Cipollone and Anita Guelfi March 2003

In this paper we look at tax credit policy as an instrument to foster hiring with open-end rather than with fixed-term contracts. In particular, we examine a specific regulation adopted in Italy in the year 2000 (credito d’imposta). This policy offers a generous and automatic tax credit to all firms hiring workers with open-end contracts. The eligibility criteria are very mild for both firms and workers. Our results seem to indicate, both formally and empirically, that firms used this subsidy primarily to hire under open-end contracts workers who would have been hired under such contracts regardless of the subsidy, albeit after a short transition into temporary employment. Our estimates suggest that, compared with 2000, in 2001 the subsidy did not increase the overall probability of being hired, but did change the composition of new employees. It increased the chances of finding an open-end contract but in a rather uneven way across workers. Conditional on being hired, the probability rose by about 10 per cent for workers holding a college degree, by about 4 per cent for people with a high-school diploma, while it did not change or might even have declined slightly for less educated workers.