Wage effects of non-wage labour costs

We study 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 predict a positive effect on wages for new entrant workers but an ambiguous effect for incumbent workers. Difference-in-differences estimates, which account for the endogeneity of the treatment status, are consistent with our model predictions and suggest that decreased firing costs and payroll taxes have a positive effect on wages of new entrants. We find larger effects for older than for younger workers and for men than for women. Calibration and simulation of the model corroborate such positive effect for new entrants and also show a positive wage effect for incumbents. The reduction in firing costs accounts, on average, for one third of the overall wage increase.