Paying for Others' Protection: Causal Evidence on Wages in a Two-Tier System

Abstract

In a segmented labor market, theory predicts that employment protection has an asymmetric impact on entry and incumbent wages. We explore a reform that increased the protection of open-ended contracts for a well-defined subset of firms, while leaving it unchanged for other firms. The causal evidence points to a reduction in wages for new open-ended and fixed-term contracts and no impact for more tenured workers. The reductions estimated for entrants oscillate between -0.9 and -0.5 p.p., covering a significant part of the expected increase in firing costs. Firms with larger shares of fixed-term contracts shifted the burden to these workers.

Keywords: wages, two-tier systems, quasi-experiment, employment protection

JEL Classification: J31, J32, J63