Prepared with SEVI SLIDES Effects of Employment Protection Legislation on wages: a regression discontinuity approach Marco Leonardi (Universit` a di Milano and IZA) Giovanni Pica (Universit` a di Salerno and CSEF) LA VALUTAZIONE DELL’IMPATTO DI INTERVENTI PUBBLICI: METODI E STUDI DI CASO Firenze 18-19 Gennaio 2007 ➲ ➪ ➪
Summary ➟ ➠ ➪ • Motivation ➟➠ • The evolution of Italian EPL ➟ • Identification: Regression Discontinuity Design ➟ • Endogeneity of treatment status ➟ • Data Description ➟ • Regression model ➟ • IV model ➟➠ • Results ➟ • Summary and preliminary conclusions ➟ ➪ ➲ ➪ ➟ ➠
Motivation (1/2) ➣➟ ➪ • The paper estimates the effect of EPL on entry wages and on the tenure-wage profile . • Lazear (1990): the transfer part of EPL may be undone by an appropri- ately designed wage contract = ⇒ EPL has no real effects (Mantained hp: no contractual nor markets imperfections). • Guell (2003): in an efficiency wages framework, severance payments raise wages. • Wage effects of EPL also important to discern to GE effect of firing costs (Ljungqvist (2002) and Garibaldi and Violante (2005)). ➲ ➪ ➪ ➟ ➣ ➥ 1 27
Motivation (2/2) ➢ ➟ ➪ Empirical strategy: • Focus on Italy and exploit two sources of variation of EPL: over time (1990 reform) and among firms of different size (above/below 15 employees). • Previous work on Italy: effects of EPL on employment, firm size and job flows (Boeri and Jimeno (2003), Borgarello, Garibaldi and Pacelli (2002), Schivardi and Torrini (2004), Kugler and Pica (2006)). ➲ ➪ ➪ ➟ ➥ ➢ 2 27
➱ GE effects of the tax component of EPL (1/2) ➣ ➪ • What is the effect of the tax component of EPL on employment and unemployment? • Partial equilibrium analysis (Bentolila-Bertola 1990, Bertola 1990): ambiguous effects • Early general equilibrium analysis (Burda 1992, Hopenhayn and Roger- son 1993, Saint-Paul 1995): employment down • Later general equilibrium analysis (Alvarez and Veracierto 1998, Mortensen and Pissarides 1999): employment up ➱ ➲ ➪ ➪ ➟ ➣ ➥ 3 27
➱ GE effects of the tax component of EPL (2/2) ➢ ➪ • Ljungqvist (2002) shows that: • In models with employment lotteries, employment goes down due to the diminished private return to work • In matching models where workers’ relative share of surplus goes up with firing costs, unemployment goes up • In matching models with constant split of the match surplus (and in search models), unemployment goes down (frictional unemployment down) • In a two-tier wage system (Mortensen and Pissarides 1999), if the relative split of the match surplus among the firm and unemployed workers is constant, unemployment goes down. ➱ ➲ ➪ ➪ ➟ ➥ ➢ 4 27
Two-tier labour market ➪ • The firm does not incur any firing cost if it does not reach an agreement in the first encounter. In contrast the firm’s threat point is weakened in future negotiations because of the firing cost τ . In this case: w 1 ( p ) = w ( p ) − βδτ w + ( p ) = w ( p ) + rβδτ • The wage is reduced in the first period by the worker’s share δ of any future lay-off tax, and future wages are increased by an amount equal to the net interest on the ’posted’ bond. • This two-tier specification is equivalent to one with constant split of the match surplus in any period (Ljungqvist 2002), where unemployment goes also down. • Ljungqvist 2002 models the firing cost as a tax. Of course, if it was a pure transfer it would have no real effects (Lazear 1990). ➲ ➪ ➪
GE effects of the transfer component of EPL ➱ ➪ • Garibaldi and Violante (2005) show that in a two-tier matching model: • Under full wage rigidity transfers and taxes are equivalent (i.e. same real effects). • If only the wages of the outsiders are flexible EPL lowers unemploy- ment. • If only the wages of the insider are flexible EPL has an ambiguous effect on unemployment. ➱ ➲ ➪ ➪ ➟ 6 27
➟ ➪ The evolution of Italian EPL Individual dismissals are costless either in case of misconduct or for eco- nomic reasons . In case of dismissal, the worker has the right to go to court. The judge decides whether the dismissal is unfair. The Italian legislation: • Statuto dei Lavoratori, 1970 • Firms > 15 employees: reinstate the unjustly dismissed worker and pay foregone wages • Firms ≤ 15 employees: exempt • L. 108, 1990 • Firms > 15 employees: no change • Firms ≤ 15 employees: pay between 2.5 and 6 months pay Although, after 1990, EPL is still stricter in firms above 15 employees, the reform narrows the gap between firms above and below 15 employees. ➲ ➟ ➠ ➪ ➪ ➟ 7 27
Identification: Regression Discontinuity Design ➟ ➪ • RDD: a dichotomous treatment that is a deterministic function of a single variable. • Randomized experiment in a neighborhood of the threshold. • Compare wages paid by firms just below 15 employees to wages paid by firms just above 15 employees before and after the reform: • Wages of new hires. • Wages of displaced workers. • Identification assumptions: • Any other variable affecting wages is continuous in firm size. • The average outcome for individuals in firms marginally above the threshold is a valid counterfactual for individuals in firms just below the threshold ➲ ➟ ➪ ➪ ➟ 8 27
Wage-firm size in 86-94: new hires ➱ ➪ Firms below 15 Firms above 15 Firms below 15 Firms above 15 670 670 490 490 1 15 30 1 15 30 Firm size Firm size Wages of new hires in years 86−89 Wages of new hires in years 91−94 Firms below 15 Firms above 15 670 490 1 15 30 Firm size Wages of new hires in years 95−97 ➱ ➲ ➟ ➪ ➪ ➟ 9 27
Wage-firm size in 86-94: displaced workers ➱ ➪ Firms below 15 Firms above 15 Firms below 15 Firms above 15 670 670 490 490 1 15 30 1 15 30 Firm size Firm size Pre−reform wages of displaced workers Wages of displaced workers in years 91−94 Firms below 15 Firms above 15 670 490 1 15 30 Firm size Wages of displaced workers in years 95−97 ➱ ➲ ➟ ➪ ➪ ➟ 10 27
Endogeneity of treatment status ➟ ➪ • Are otherwise identical firms (and workers) randomly assigned to treat- ment? • If there are benefits to receiving the treatment, those who gain se- lect themselves into the treatment group. Therefore both firms and workers may sort above and below the threshold according to their preferences. • Firms’ sorting • Workers’ sorting ➲ ➟ ➪ ➪ ➟ 11 27
Firms’ sorting ➱ ➪ • Firms keeping their size just below 15 before the reform to avoid strict EPL rules, may have increased their size because of the reform. • Previous work (Schivardi and Torrini (2004) and Borgarello, Garibaldi and Pacelli (2003)) shows that the 15 employees threshold reduces by 2% firms propensity to grow. • Simple inspection of the distribution of firm size before and after the reform is not insightful. • Regression analysis shows evidence of sorting. Better firms are less affected by the threshold. • Solution: IV strategy. ➱ ➲ ➟ ➪ ➪ ➟ 12 27
➱ Firm size distribution ➪ Pre−Reform Firm size distribution Post−Reform Firm size distribution .15 .2 .15 .1 Density Density .1 .05 .05 0 0 5 15 25 5 15 25 Firm Size Firm Size ➱ ➲ ➟ ➪ ➪ ➟ 13 27
Evidence on firms’ sorting ➱ ➪ Dependent Variable: employment growth dummy -0.008 -0.007 -0.005 Dummy 13 (0.008) (0.011) (0.011) -0.014 -0.021 -0.022 Dummy 14 (0.009) (0.011) (0.012) -0.013 -0.029 -0.032 Dummy 15 (0.009) (0.012) (0.012) - 0.049 0.057 Post 1990 - (0.007) (0.008) - -0.002 0.009 Post 1990 × Dummy 13 - (0.015) (0.017) - 0.016 0.034 Post 1990 × Dummy 14 - (0.016) (0.018) - 0.035 0.054 Post 1990 × Dummy 15 - (0.018) (0.02) - - 0.280 Firms Fixed Effect (× 1000) - - (0.025) - - 0.083 Firms Fixed Effect × Dummy 13 (× 1000) - - (0.105) - - 0.062 Firms Fixed Effect × Dummy 14 (× 1000) - - (0.114) - - -0.017 Firms Fixed Effect × Dummy 15 (× 1000) - - (0.118) - - -0.090 Post 1990 × Firms Fixed Effect (× 1000) - - (0.037) - - 0.105 Post 1990 × Firms Fixed Effect × Dummy 13 (× 1000) - - (0.086) - - 0.360 Post 1990 × Firms Fixed Effect × Dummy 14 (× 1000) - - (0.177) - - 0.455 Post 1990 × Firms Fixed Effect × Dummy 15 (× 1000) - - (0.19) N 104061 104061 97858 ➱ ➲ ➟ ➪ ➪ ➟ 14 27
Workers’ sorting ➱ ➪ • Do workers move differently before and after the reform? • Conditional on moving no evidence of sorting: Graph. • Find evidence that better workers move more from small to large firms after the reform: table • To minimize workers’ sorting we take a sample of exogenously dis- placed workers. ➱ ➲ ➟ ➪ ➪ ➟ 15 27
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