Can employment subsidies and greater labour market flexibility increase job opportunities for youth? Revisiting the Italian On-the-job Training Program

The CFL (On-the-job Training) programme was introduced in Italy in 1985 with the aim of reducing youth unemployment. The new programme offered employers two main advantages: it exempted them almost completely from payment of payroll taxes and it provided them with virtually the only opportunity to employ people on a basis of fixed term contracts. The paper looks at the employment impact of the programme among a subgroup of eligible workers and finds that firms taking part increased employment more than non-participating firms by almost 5%. Employers had a strong positive reaction to the tax subsidies and to the softening of the rigid employment code. The overall effect of the programme on youth employment was however limited, registering only a 1% increase, mainly because about 80% of firms never participated.