ROME (Reuters) - Italy should repeal parts of the labour reform adopted last year by former prime minister Mario Monti and make it easier to hire young workers on temporary contracts, the OECD's chief economist told Reuters in an interview on Friday.
Prime Minister Enrico Letta plans to present a package of measures next week aimed at tackling record joblessness of more than 40 percent among young people.
"I would ease entry regulations by making it more convenient to hire on a temporary basis and with greater flexibility," Pier Carlo Padoan, chief economist of the Paris-based Organisation for Economic Cooperation and Development, said.
"I know this raises the objection of re-creating the dual labour market, but in this situation of extreme distress I think it is necessary," Padoan said.
His proposal would be likely to meet with tough opposition from Italy's trade unions and the more left-wing parts of Letta's broad, left-right coalition.
Monti's labour reform, approved after long negotiations with trade unions and political parties, slightly eased firing restrictions on regular workers, while curbing the use of the temporary contracts widely used to hire young people.
It aimed to reduce the so-called "dual" labour market between protected older workers and millions of young people with virtually no labour rights.
But the reform was widely criticised by unions and employers, and as Italy's longest post-war recession has dragged on the jobless rate has risen steadily. Unemployment among people under the age of 24 now stands at an all-time record of more than 40 percent.
Padoan said Letta should also try to increase the efficiency of public and private job centres and lower labour taxes in general, but especially on young workers.
He urged the government to re-think its plans for fiscal policy which, at the insistence of Silvio Berlusconi's centre-right, have so far aimed at lowering housing and sales taxes.
"The OECD has maintained that you should tax property rather than labour and capital and, especially with so little fiscal space available, that ranking should be respected," he said.
This month Italy was removed from the European Union's blacklist of countries with excessive fiscal deficits, but Rome's budget deficit target this year, at 2.9 percent of output, is right up against the EU's 3 percent ceiling.
Padoan warned Letta against bowing to pressure to cancel a hike in sales tax due to take effect in July.
"I understand that raising value-added tax is bad for consumption, but now the fiscal position has been improved and reversing that would carry a lot of risk with markets," he said.
The gap between Italy's benchmark bond yields and safer German Bunds has risen in recent days but, at around 2.85 percentage points it is still far below a peak above 5.5 points at the height of the euro zone debt crisis in 2011.
Padoan said that the so-called "spread" had fallen largely due to liquidity and guarantees offered by the European Central Bank and that it would only come down further if Letta presented a credible medium-term plan of structural reforms.
"The ECB has fixed the systemic risk part of the spread, but Italy still needs to fix the domestic risk part," he said.
Labour, education and justice reform are high on the list of the OECD's recommendations for Italy and the need for the latter was highlighted by a comparative report on civil justice systems presented by Padoan to the Italian Senate on Friday.
The report showed Italy has the slowest civil justice system among 24 countries surveyed by the OECD. An average case takes 564 days to reach an initial verdict in Italy, compared with an average of 240 days among the other countries surveyed and just 107 days in Japan, the best performer.
To reach a final verdict after the two appeals allowed in Italy, a civil case in Italy takes an average of almost 8 years to clear the courts.
"All this has a big impact on economic performance, it makes banks less willing to lend and it increases the cost of credit," Padoan said.
Editing by Hugh Lawson