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

Abstract

This study estimates the effect of employment protection legislation on wages, exploiting the 1990 Italian reform that introduced unjust dismissal costs for firms below 15 employees. We find that the slight average wage reduction induced by the reform 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. Also, the negative effect of the reform is stronger for young blue collars, low‐wage workers and workers in low‐employment regions. This pattern suggests that the ability of employers to shift firing costs onto wages depends on workers’ relative bargaining power.