Rossella Bardazzi, Maria Grazia Pazienza

The Effects on small and medium enterprises of the severance pay reform: a microsimulation analysis

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The Social Security Reform recently passed by the Italian Parliament establishes, starting from 2008, a system designed to promote a switch to pension funds of the resources which were until now used for severance pay. This amount is a deferred salary which is accorded to employees when they leave their jobs, revaluated at a predetermined rate. From another perspective, this fund is accumulated by the firm as a long term debt and therefore represents an important form of self-financing. In this paper we evaluate the consequences of the reform on the financial cost for firms. This aspect has not been empirically investigated so far. Thus we intend to give a contribution on the quantitative evaluation of the costs for firms due to differential between severance pay costs and bank lending expenses. We perform this analysis by means of a microsimulation model for all non-agricultural and non-financial Italian firms. Our model produces significant results as it covers small and very small firms which are likely to be more affected by the reform because they rely mainly on self financing and pay higher interest rates. Results are evaluated under different hypotheses about inflation, interest rates, and resources switched to pension funds. Simulations confirm that small and medium sized enterprises bear the main burden of the reform. Compensatory measures provided by the reform succeed in balancing additional financial costs for firms in the long run only under a non inflationary framework.

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