1 Reforms, labour market functioning and productivity dynamics: a sectoral analysis for Italy.* 1 Cecilia Jona Lasinio Istat and LUISSlab Giovanna Vallanti Luiss Guido Carli, CeLEG and LUISSlab Abstract Over the last two decades Italy registered notable improvements in the functioning of labour market. However, such improvements have been accompanied by a deterioration in terms of productivity and competitiveness. This paper provides some evidence in this respect evaluating to what extent labour market reforms might have influenced the poor productivity performance of the Italian economy over the period 1980-2008. We show that labour market deregulation had a negative effect on aggregate labour productivity through both the within and the reallocative components. Our results show that the increased flexibility in the use of temporary contract has led to a lower productivity (level and to a lesser extent growth rate) in all sectors, with a higher impact on those industries with a higher flexibility need. Conversely, the use of temporary contracts has a significant lower effect in industries with higher skill content. The negative effect of the reforms on the reallocative capacity is stronger in those industries with a higher flexibility need that are also the relatively lower productivity sectors in the period 1993-2008. * We are especially indebted to Daria Ciriaci for her research assistance and feedback at an early stage of this project. We thank Flavio Padrini for usefull comments and suggestions, participants at the Brown Bag Lunch Meeting at the Department of Treasury and Milano Bicocca Lunch seminar. The project is supported by a Research Agreement with the Department of Tresury at the Italian Ministry of Economics and Finance. All errors are ours.