Layoffs and economic crisis: a time series analysis on the Italian labor market

The economic crisis that starts in 2007 in the U.S. has had dramatic effects in Italy. The level of GDP in 2009 falls of 5 percentage points, followed by production, employment and wages. This scenario underlines the weaknesses of the Italian labor market and a significant recourse to layoffs especially during the downswing. Although the evidence indicates that there is a link between aggregate supply and labour, researches on this topic are fragmented and they are not as straightforward as they appear. In order to fill this lacuna, by applying a traditional production function we use a bivariate VAR model to assess whether aggregate supply is driven by labour force. We use the industrial production index as proxy of GDP and layoffs as proxy for unemployment. Data are drawn from the Eurostat database and INPS database over the period 2005-2014. To take into account the events connected with the recession we add a dummy variable as an exogenous variable. The Granger causality test shows that in the short run there is a two-way relation from the industrial production index to ordinary layoffs. From these results emerge that layoffs ordinary layoffs may be used as a policy to contrast the economic cycle.