Do wages increase when severance pay drops? Not in recessions

Pedro Martins

No 77, Working Papers from Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research

Abstract: According to theory, wage rigidity may increase the scope for employment protection legislation (EPL) to have negative effects on employment. In this paper, we study this issue by analysing the extent to which entry wages respond to EPL. We exploit a recent reform in Portugal, in the midst of a recession, that reduced severance pay for new hires alone. Our main analysis is based on a regression-discontinuity approach using long monthly data on entry wages. We find no evidence of wage adjustments following the change in EPL, even when considering many different specifications and samples. This result highlights the potential of greater flexibility in EPL over the business cycle to reduce employment fluctuations.

Keywords: Employment law; Seasonality; Wage rigidity; Severance (search for similar items in EconPapers)
JEL-codes: E24 J31 J65 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-eur, nep-hap and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cgs:wpaper:77

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