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

  • Marco Leonardi

    ()

    (University of Milan and IZA)

  • Giovanni Pica

    ()

    (Università di Salerno and CSEF)

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 the slight average wage reduction (between –0.4 and –0.1 percent) that follows the increase in EPL hides highly heterogeneous effects. Workers who change firm during the reform period suffer a drop in the entry wage, while incumbent workers are left unaffected. Results also indicate that the negative wage effect of the EPL reform is stronger on young blue collars and on workers at the low-end of the wage distribution. Finally, workers in low-employment regions suffer higher wage reductions after the reform. This pattern suggests that the ability of the employers to shift EPL costs onto wages depends on workers' and firms' relative bargaining power.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 265.

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Date of creation: 21 Nov 2010
Date of revision: 13 May 2012
Publication status: Published in Economic Journal, 2013, 123(573), pp. 1236-1278.
Handle: RePEc:sef:csefwp:265
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