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Employment protection legislation and wages

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Author Info
Marco Leonardi () (University of Milan and IZA, via Festa del Perdono 7, 20122 Milan, Italy.)
Giovanni Pica () (University of Salerno and CSEF, via Ponte don Melillo, 84084 Fisciano, Italy.)

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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. JEL Classification: E24, J63, J65.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 778.

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Length: 42 pages
Date of creation: Jul 2007
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Handle: RePEc:ecb:ecbwps:20070778

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Related research
Keywords: Costs of Unjust Dismissals; Severance Payments; Regression Discontinuity Design.;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June. [Downloadable!] (restricted)
  2. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2005. "Insurance within the Firm," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1054-1087, October.
    Other versions:
  3. Garibaldi, Pietro & Pacelli, Lia & Borgarello, Andrea, 2003. "Employment Protection Legislation and the Size of Firms," IZA Discussion Papers 787, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August. [Downloadable!] (restricted)
  5. Adriana D. Kugler & Gilles Saint-Paul, 2004. "How Do Firing Costs Affect Worker Flows in a World with Adverse Selection?," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 553-584, July. [Downloadable!]
  6. repec:fth:prinin:433 is not listed on IDEAS
  7. Maia Guell, 2000. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 812, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  8. Maia Güell, 2000. "Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis," CEP Discussion Papers dp0461, Centre for Economic Performance, LSE. [Downloadable!]
  9. Battistin, Erich & Rettore, Enrico, 2008. "Ineligibles and eligible non-participants as a double comparison group in regression-discontinuity designs," Journal of Econometrics, Elsevier, vol. 142(2), pages 715-730, February. [Downloadable!] (restricted)
  10. Giuseppe Nicoletti & Stefano Scarpetta & Olivier Boylaud, 2000. "Summary Indicators of Product Market Regulation with an Extension to Employment Protection Legislation," OECD Economics Department Working Papers 226, OECD, Economics Department. [Downloadable!]
  11. Pietro Garibaldi & Giovanni L. Violante, 2005. "The Employment Effects of Severance Payments with Wage Rigidities," Economic Journal, Royal Economic Society, vol. 115(506), pages 799-832, October. [Downloadable!] (restricted)
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  12. Roberto Torrini & Fabiano Schivardi, 2004. "Threshold effects and firm size: The case of firing costs," 2004 Meeting Papers 445, Society for Economic Dynamics. [Downloadable!]
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  13. David H. Autor, 2003. "Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing," Journal of Labor Economics, University of Chicago Press, vol. 21(1), pages 1-42, January. [Downloadable!]
  14. Bertola, Giuseppe & Rogerson, Richard, 1996. "Institutions and Labour Reallocation," CEPR Discussion Papers 1519, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. David H. Autor & John J. Donohue & Stewart J. Schwab, 2004. "The Employment Consequences of Wrongful-Discharge Laws: Large, Small, or None at All?," American Economic Review, American Economic Association, vol. 94(2), pages 440-446, May. [Downloadable!]
  16. Jacobson, Louis S & LaLonde, Robert J & Sullivan, Daniel G, 1993. "Earnings Losses of Displaced Workers," American Economic Review, American Economic Association, vol. 83(4), pages 685-709, September. [Downloadable!] (restricted)
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  17. Belzil, Christian, 2000. "Job Creation and Job Destruction, Worker Reallocation, and Wages," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 183-203, April. [Downloadable!] (restricted)
  18. David H. Autor & William R. Kerr & Adriana D. Kugler, 2007. "Do Employment Protections Reduce Productivity? Evidence from U.S. States," IZA Discussion Papers 2571, Institute for the Study of Labor (IZA). [Downloadable!]
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  19. Maida Agata & Devicienti Francesco & Sestito Paolo, 2005. "Downward wage rigidity in Italy: micro-based measures and implications," Department of Economics Working Papers 200503, University of Turin. [Downloadable!]
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  20. Richard B. Freeman & Lawrence F. Katz, 1995. "Differences and Changes in Wage Structures," NBER Books, National Bureau of Economic Research, Inc, number free95-1.
  21. David H Autor & John J Donohue & Stewart J Schwab, 2006. "The Costs of Wrongful-Discharge Laws," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 211-231, 08. [Downloadable!] (restricted)
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  22. Christopher L. Erikson & Andrea Ichino, 1994. "Wage Differentials in Italy: Market Forces, Institutions, and Inflation," NBER Working Papers 4922, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, vol. 69(1), pages 201-09, January.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Bassanini, Andrea & Nunziata, Luca & Venn, Danielle, 2008. "Job Protection Legislation and Productivity Growth in OECD Countries," IZA Discussion Papers 3555, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. van der Wiel, Karen M., 2008. "Better Protected, Better Paid: Evidence on How Employment Protection Affects Wages," IZA Discussion Papers 3352, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Rikke Ibsen & Elisabetta Trevisan & Niels Westergaard-Nielsen, 2008. "Job Mobility and Skill Transferability. Some Evidences from Denmark and a Large Italian Region," Working Papers 2008_40, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  4. Pedro S. Martins, 2007. "Dismissals for Cause: The Difference That Just Eight Paragraphs Can Make," IZA Discussion Papers 3112, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Grassi, Emanuele, 2009. "EPL and Job Contract Conversion Rate: The Italian CFL Case," MPRA Paper 12679, University Library of Munich, Germany. [Downloadable!]
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