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


  • This is a revised version of an article previously circulated under the title Employment Protection Legislation and Wages. We are grateful to two anonymous referees, Giuseppe Bertola, David Card, Ken Chay, Tommaso Frattini, Winfried Koeniger, Andrea Ichino, Enrico Moretti, Tommaso Nannicini and Michele Pellizzari for useful suggestions. Comments from seminar participants at the University of California at Berkeley, Boston College, Georgetown University, Queen Mary University of London, University of Milan, University of Salerno, University of Padova, University of Venezia, the Fifth IZA/SOLE Transatlantic Meeting, the 7th ECB/CEPR Labour Market Workshop are also gratefully acknowledged. We thank Giuseppe Tattara and Marco Valentini for providing us with the VWH (Veneto Workers History) data set (Miur Projects 1999–2001 #9913193479 and 2001–2003 #2001134473) and Bruno Contini of the LABORatorio Riccardo Revelli for providing us with a sample of the INPS data set. Giovanni Pica gratefully acknowledges support from the University of Salerno grant programme ‘High Performance Computing – HPC – prot. ASSA098434, 2009’ and from the Europlace Institut of Finance (Project: Finance and Labour, 2011). The usual disclaimer applies.


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.