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Giovanni Pica

24 July 2007
In a perfect labour market severance payments can have no real effects as they can be undone by a properly designed labour contract (Lazear 1990). We give empirical content to this proposition by estimating the effects of EPL on entry wages and on the tenure-wage profile in a quasi-experimental setting. We consider a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for bigger firms. Estimates which account for the endogeneity of the treatment status due to workers and firms sorting around the 15 employees threshold show no effect of the reform on entry wages and a decrease of the returns to tenure by around 20% in the first year and by 8% over the first two years. We interpret these findings as broadly consistent with Lazear's (1990) prediction that firms make workers prepay the severance cost.
JEL Code
E24 : Macroeconomics and Monetary Economics→Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy→Employment, Unemployment, Wages, Intergenerational Income Distribution, Aggregate Human Capital
J63 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Turnover, Vacancies, Layoffs
J65 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment Insurance, Severance Pay, Plant Closings
ECB/CEPR labour market workshop on wage and labour cost dynamics