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

Listed author(s):
  • Leonardi, Marco

    ()

    (University of Milan)

  • Pica, Giovanni

    ()

    (University of Milan)

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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5335.

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Length: 35 pages
Date of creation: Nov 2010
Handle: RePEc:iza:izadps:dp5335
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