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Do wages increase when severance pay drops? Not in recessions

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  • Pedro S. Martins

Abstract

According to theory, wage rigidity may increase the scope for employment protection legislation (EPL) to have negative effects on employment. In this paper, we study this issue by analysing the extent to which entry wages respond to EPL. We exploit a recent reform in Portugal, in the midst of a recession, that reduced severance pay for new hires alone. Our main analysis is based on a regression-discontinuity approach using long monthly data on entry wages. We find no evidence of wage adjustments following the change in EPL, even when considering many different specifications and samples. This result highlights the potential of greater flexibility in EPL over the business cycle to reduce employment fluctuations.

Suggested Citation

  • Pedro S. Martins, 2016. "Do wages increase when severance pay drops? Not in recessions," Working Papers 77, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
  • Handle: RePEc:cgs:wpaper:77
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    File URL: http://cgr.sbm.qmul.ac.uk/CGRWP77.pdf
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    References listed on IDEAS

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    1. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie E. Ward, 2007. "How Wages Change: Micro Evidence from the International Wage Flexibility Project," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 195-214, Spring.
    2. Jan Babecký & Philip Du Caju & Theodora Kosma & Martina Lawless & Julián Messina & Tairi Rõõm, 2010. "Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 884-910, December.
    3. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
    4. Pedro S. Martins, 2015. "Working to get fired? Regression discontinuity effects of unemployment benefit eligibility on prior employment duration," Working Papers 61, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    5. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.
    6. Pedro S. Martins, 2016. "Can overtime premium flexibility promote employment? Firm- and worker-level evidence from a labour law reform," Working Papers 72, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    7. Ch. Pissarides., 2011. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
    8. Hijzen Alexander & Martins Pedro S., 2020. "No extension without representation? Evidence from a natural experiment in collective bargaining," IZA Journal of Labor Economics, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 9(1), pages 1-31, March.
    9. Martins, Pedro S., 2021. "Should the maximum duration of fixed-term contracts increase in recessions? Evidence from a law reform," International Review of Law and Economics, Elsevier, vol. 68(C).
    10. Fernando Martins & Pedro Portugal, 2014. "Wage adjustments during a severe economic downturn," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    11. Cervini-Plá, María & Ramos, Xavier & Ignacio Silva, José, 2014. "Wage effects of non-wage labour costs," European Economic Review, Elsevier, vol. 72(C), pages 113-137.
    12. Holzmann, Robert & Pouget, Yann & Vodopivec, Milan & Weber, Michael, 2011. "Severance pay programs around the world : history, rationale, status, and reforms," Social Protection Discussion Papers and Notes 62726, The World Bank.
    13. van der Wiel, Karen, 2010. "Better protected, better paid: Evidence on how employment protection affects wages," Labour Economics, Elsevier, vol. 17(1), pages 16-26, January.
    14. Martins, Pedro S., 2016. "The Third Worker: Assessing the Trade-off between Employees and Contractors," IZA Discussion Papers 10222, Institute of Labor Economics (IZA).
    15. Pedro S. Martins & Gary Solon & Jonathan P. Thomas, 2012. "Measuring What Employers Do about Entry Wages over the Business Cycle: A New Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 36-55, October.
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    Cited by:

    1. Pedro S. Martins, 2016. "The third worker: Assessing the trade-off between employees and contractors," Working Papers 75, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.

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    More about this item

    Keywords

    Employment law; Seasonality; Wage rigidity; Severance;
    All these keywords.

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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