Cutting the Labor Tax Wedge in Hard Times. Evidence from an Italian Reform

As the first step of a strategy aimed at implementing a fiscal devaluation, in 2007, the Italian government implemented a reform reducing the labor tax wedge to boost firms' competitiveness. In this paper, we provide evidence on the causal impact on employment of this reform by estimating a DDD model that exploits differences across geographical areas and sectors of economic activity in the tax allowances. We find mildly positive effects of the reform on employment. We interpret this result by observing that the magnitude of the tax incentive was too small for firms to substantially increase the number of workers.