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

  • Marco Leonardi
  • Giovanni Pica

Theory predicts that the wage effects of government-mandated severance payments depend on workers' and firms' relative bargaining power. 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 high-bargaining power workers (stayers, white collar and workers above 45) are almost left unaffected by the increase in EPL, while low-bargaining power workers (movers, blue collar and young workers) suffer a drop both in the wage level and its growth rate.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 123 (2013)
Issue (Month): 12 (December)
Pages: 1236-1278

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Handle: RePEc:ecj:econjl:v:123:y:2013:i:12:p:1236-1278
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