Wage Effects of Non-Wage Labour Costs

María Cervini-Plá, Xavi Ramos () and José Silva

No 4882, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We study short- and long-term wage effects of two important elements of non-wage labour costs: firing costs and payroll taxes. We exploit a reform that introduced substantial reduction in these two provisions for unemployed workers aged less than thirty and over forty five years. Theoretical insights are gained with a matching model with heterogeneous workers, which predicts an ambiguous effect on wages: firing costs are expected to increase wages, because they increase the bargaining power of workers, while the effect of payroll taxes is negative. Difference-in-differences estimates, which account for the endogeneity of the treatment status, suggest that decreased firing costs and payroll taxes have a positive overall short-term effect on wages – and also on unemployment. We find larger effects for older than for younger workers and for men than for women. Calibration and simulation of the model shows that about fifty percent of the predicted cumulative increase on wages takes place during the first year of the reform. Our simulations also show that the increase in wages is mostly due to the reduction in payroll taxes, while the overall effect of firing costs is nil because direct and indirect effects of firing costs offset each other.

Keywords: Spain; dismissal costs; matching model; difference-in-difference; evaluation of labour market reforms; payroll tax (search for similar items in EconPapers)
JEL-codes: C23 D31 J31 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-04
New Economics Papers: this item is included in nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published - substantially revised version published in: European Economic Review, 2014, 72, 113-137. Winner of the 2015 Spanish Association for Labour Economics Best Paper Award.

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Related works:
Journal Article: Wage effects of non-wage labour costs (2014)
Working Paper: Wage effects of non-wage labour costs (2011)
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