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Wage Effects of Non-Wage Labour Costs

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  • Cervini-Plá, María

    ()
    (Universitat de Girona)

  • Ramos, Xavi

    ()
    (Universitat Autònoma de Barcelona)

  • Silva, José I.

    ()
    (University of Kent)

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.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4882.

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Length: 34 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:iza:izadps:dp4882

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Keywords: dismissal costs; payroll tax; evaluation of labour market reforms; difference-in-difference; matching model; Spain;

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References

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  1. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
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Citations

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Cited by:
  1. Cervini-Plá, María & Ramos, Xavi & Silva, José I., 2010. "Wage Effects of Non-Wage Labour Costs," IZA Discussion Papers 4882, Institute for the Study of Labor (IZA).
  2. Marco Leonardi & Giovanni Pica, 2007. "Employment Protection Legislation and Wages," CSEF Working Papers 175, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2013. "Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy," Development Working Papers 354, Centro Studi Luca d\'Agliano, University of Milano.
  4. Marco Leonardi & Giovanni Pica, 2010. "Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation," CSEF Working Papers 265, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 13 May 2012.
  5. Hallberg, Daniel, 2011. "Is Early Retirement Encouraged by the Employer? Labor-Demand Effects of Age-Related Collective Fees," Working Paper Series, Center for Labor Studies 2011:5, Uppsala University, Department of Economics.

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