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Paying for Others' Protection: Causal Evidence on Wages in a Two-Tier System


  • Centeno, Mario

    () (Banco de Portugal)

  • Novo, Alvaro A.

    () (Banco de Portugal)


In a segmented labor market, theory predicts that employment protection has an asymmetric impact on entry and incumbent wages. We explore a reform that increased the protection of open-ended contracts for a well-defined subset of firms, while leaving it unchanged for other firms. The causal evidence points to a reduction in wages for new open-ended and fixed-term contracts and no impact for more tenured workers. The reductions estimated for entrants oscillate between -0.9 and -0.5 p.p., covering a significant part of the expected increase in firing costs. Firms with larger shares of fixed-term contracts shifted the burden to these workers.

Suggested Citation

  • Centeno, Mario & Novo, Alvaro A., 2014. "Paying for Others' Protection: Causal Evidence on Wages in a Two-Tier System," IZA Discussion Papers 8702, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp8702

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    Cited by:

    1. Böckerman, Petri & Skedinger, Per & Uusitalo, Roope, 2015. "Seniority rules, worker mobility and wages: Evidence from multi-country linked employer-employee data," MPRA Paper 68581, University Library of Munich, Germany.

    More about this item


    wages; two-tier systems; quasi-experiment; employment protection;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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