Effects of Employment Protection Legislation on Wages: a Regression Discontinuity Approach∗

This paper uses Regression Discontinuity Design to study the wage effects of a reform that introduced unjust dismissal costs for firms below 15 employees, while leaving firing costs unchanged for bigger firms. We address the endogeneity of the treatment status due to workers and firms sorting around the 15 employees threshold by applying IV techniques on a sample of exogenously displaced workers. The estimates show that male entry wages were around 6% lower on average because of the 1990 EPL reform, implying that as much as 25% of the firing cost was shifted onto lower wages. Among males, blue collars and young blue collars workers bore the burden of the wage reduction. The reform is also found to lower the wages of female blue collar workers by 5%.