The effect of flexibility on wage: Evidence from italian linked employer-employee data

In the recent past many European Governments adopted policies targeted to obtain employment flexibility and several studies highlight the relevance of the issue for unemployment flows,  unemployment duration and productivity.

This study aims at evaluating the effect of labor market flexibility on wages. A counterfactual approach is applied to Italian Linked Employer-Employee Longitudinal Data available for the period 1993-2002 and providing information on dependent workers’ and firms’ characteristics. 

The impact on wages of permanent employees of a reform deregulating the Italian labor market in late 1997 is evaluated. To achieve identification, we exploit a particular feature of the new institutional setup consisting of the introduction of Temporary Agency Workers in only some of the Italian industries. The peculiarity of the Italian normative setting generates a quasi-experimental setup which can be used to apply difference-in-differences (DD) procedures in order to evaluate the impact of TAW contracts on the wage of protected employees. In the same way, thanks to normative settings  the analysis can be pushed further. In particular, since employment protection legislation varies across firm size, being most binding for plants above 15 employees, it is possible to check whether the effect of TAW on wages of permanent workers changes according to their protection level. This gives us the opportunity to provide evidence concerning heterogeneous effects of flexibility on wages which may depend on the actual EPL enforcement.

Furthermore, as the introduction of a new type of fixed-term contract could generate flows of workers across contracts, employment status and firm size we use Fixed-Effect estimators on panel data.

We find some evidence of a generic increase of wages of employees in industries involved in the reform. Moreover we verify that the positive effect is relatively less important for protected workers hired permanently. This effect is consistent with labor productivity improvements.