Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation

Marco Leonardi and Giovanni Pica

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper estimates the effect of employment protection legislation (EPL) on workers' individual wages in a quasi-experimental setting, exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees and left firing costs unchanged for bigger firms. Accounting for the endogeneity of the treatment status, we find that the slight average wage reduction (between –0.4 and –0.1 percent) that follows the increase in EPL hides highly heterogeneous effects. Workers who change firm during the reform period suffer a drop in the entry wage, while incumbent workers are left unaffected. Results also indicate that the negative wage effect of the EPL reform is stronger on young blue collars and on workers at the low-end of the wage distribution. Finally, workers in low-employment regions suffer higher wage reductions after the reform. This pattern suggests that the ability of the employers to shift EPL costs onto wages depends on workers' and firms' relative bargaining power.

Keywords: Costs of Unjust Dismissals; Severance Payments; Policy Evaluation; Endogeneity of Treatment Status (search for similar items in EconPapers)
JEL-codes: E24 J3 J65 (search for similar items in EconPapers)
Date: 2010-11-21, Revised 2012-05-13
New Economics Papers: this item is included in nep-bec and nep-lab
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Citations: View citations in EconPapers (6)

Published in Economic Journal, 2013, 123(573), pp. 1236-1278.

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Related works:
Journal Article: Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation (2013)
Working Paper: Who pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation (2012)
Working Paper: Who Pays for It? The Heterogeneous Wage Effects of Employment Protection Legislation (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:265

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