Are Immigrants a Substitute for Flexibility? Quasi-experimental Evidence From Italian Small Firms

Abstract

This paper investigates whether firms respond to a strengthening of Employment Protection Legislation by using more immigrant workers. The underlying idea is that immigrants allow firms to cut on hiring costs as they can be sacked more easily because less inclined to challenge potentially unfair dismissals despite being formally entitled to the same level of contractual job protection. Using a reform that increased EPL in firms with fewer than fifteen employees but left protection unchanged for larger firms, we find that higher firing costs increase the firm's immigrant labour intensity by a magnitude between 14.1% and 22%. These effects are mainly driven by industries with high demand volatility and low-tech production processes.

Keywords: Immigration; Employment protection; Small firms; Difference-in-difference

JEL Classification: J15, J32, J65.