Rebalancing Power Asymmetries Within Firms: Evidence from Illegal Resignations

We document the extent of employer abuse of power and characterise the employers most likely to engage in abusive relationships with their employees. We leverage an Italian reform that changed the process for submitting voluntary resignations from a paper-based system to an online one. This reform aimed to curb the illegal practice of requiring workers to sign undated resignation letters, which employers could later use at their discretion to avoid the costs associated with dismissals - a clear manifestation of power abuse. Using difference-in-differences estimation, we document that resignations declined more in firms with higher shares of vulnerable workers, those operating in weaker local labour markets, and those with lower productivity. Both firms and workers adjusted their behaviour in response to the reform. Firms reduced overall hiring, with no evidence of differential effects by worker demographics, suggesting that cost-saving motives rather than taste-based discrimination drove their response. At the worker-level, we observe a decrease in workplace injuries, indicating that the reform strengthened workers’ bargaining power and improved overall workplace safety.