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Wage Effects of Non-Wage Labour Costs

Author

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  • Cervini-Plá, María

    () (Universitat de Girona)

  • Ramos, Xavier

    () (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.

Suggested Citation

  • Cervini-Plá, María & Ramos, Xavier & Silva, José I., 2010. "Wage Effects of Non-Wage Labour Costs," IZA Discussion Papers 4882, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp4882
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    Cited by:

    1. 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.
    2. Marco Leonardi & Giovanni Pica, 2013. "Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation," Economic Journal, Royal Economic Society, vol. 123(12), pages 1236-1278, December.
    3. Federico Cingano & Marco Leonardi & Julián Messina & Giovanni Pica, 2016. "Employment Protection Legislation, Capital Investment and Access to Credit: Evidence from Italy," Economic Journal, Royal Economic Society, vol. 126(595), pages 1798-1822, September.
    4. 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.
    5. Leonardi, Marco & Pica, Giovanni, 2007. "Employment protection legislation and wages," Working Paper Series 778, European Central Bank.
    6. 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.

    More about this item

    Keywords

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

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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