Employment Protection Legislation and Wages

Marco Leonardi and Giovanni Pica

No 2680, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In a perfect labor market severance payments can have no real effects as they can be undone by a properly designed labor contract (Lazear 1990). We give empirical content to this proposition by estimating the effects of EPL on entry wages and on the tenure-wage profile in a quasi-experimental setting. We consider a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. Estimates which account for the endogeneity of the treatment status due to workers and firms sorting around the 15 employees threshold show no effect of the reform on entry wages and a decrease of the returns to tenure by around 20% in the first year and by 8% over the first two years. We interpret these findings as broadly consistent with Lazear’s (1990) prediction that firms make workers prepay the severance cost.

Keywords: costs of unjust dismissals; severance payments; regression discontinuity design (search for similar items in EconPapers)
JEL-codes: E24 J63 J65 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2007-03
New Economics Papers: this item is included in nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Related works:
Working Paper: Employment protection legislation and wages (2007)
Working Paper: Employment Protection Legislation and Wages (2007)
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