Essays on employment protection legislation

This thesis shows that Employment Protection Legislation (EPL) has effects on important aspects of individual welfare, like income security, propensity to save and portfolio choices. The recent recession has increased the number of unemployed in the OECD countries and this has consequences on government spending through higher expenses for unemployment insurance. Under constrained public finances, it is interesting therefore to have a better understanding of the extent by which other forms of insurance mechanism - like EPL - might produce effects on welfare of economic agents. In this light, this thesis can be viewed as a contribution to the academic and social debate. This work is structured in three papers. In the first paper I focus on a peculiar aspect of EPL, that is the legislation on temporary contracts. In the second and in the third papers I consider EPL in relation to hiring and firing procedures on open-ended contracts. The first paper is entitled “Temporary Workforce and Wage Instability: a descriptive analysis from US and Italy”. The lower pay and the temporary nature of the contract induced the literature to consider the increasing temporary workforce as an important determinant of wage instability, that is the transitory component of the variance of wages. In this work the share of temporary workforce in US and Italy is associated to a measure of wage instability. Results show that there is a positive association between wage instability and temporary workforce in Italy, and this association is even stronger for high educated workers, whose temporary-permanent wage gap is higher with respect to less educated workers. This association is less evident in US because temporary workforce is not massively used (compared to the large utilization in Italy started from 2000s reforms) and because there is a more dynamic system of hiring and firing (and therefore higher re-employment probability) on open-ended contract. The second paper, “Employment Protection Legislation and Precautionary Saving”, studies the relationship existing between Employment Protection Legislation and precautionary saving. A stringent EPL lowers both hiring and firing probabilities. In a life-cycle model which allows for unemployment spells, individuals react to a simultaneous decrease of hiring and firing probabilities by saving more. These implications are tested by a diff-in-diff strategy thanks to the implementation of the exceptions to employment-at-will doctrine, which took place in US in 70s, 80s and 90s and which made firings more difficult. These exceptions are the implied contract exception, the public policy exception and the good faith exception; their specificity is described in the institutional framework of the paper. The public policy exception is found to have decreased the re-employment probability and to have increased the probability to remain into unemployoment among young head-households. Moreover, this exception is found to have increased the accumulation of financial asset, and this effect is double for young heads, who are tipically less experienced. Moreover, results show that also the implied contract has positive effect on financial asset accumulation. The third paper, “Job Loss Experience, Employment Protection Legislation and Portfolio Choice” is a joint work with Marianna Brunetti, assistant professor at University of Rome “Tor Vergata”. This work empirically assesses the role of job loss experience on the portfolio choices of individuals facing different levels of EPL. A job loss experience is able to re-shape risk aversion of individuals and the extent by which it affects portfolio choices might depend also by EPL. Our contribution is twofold. Theoretically, we propose a model of consumption and portfolio choice which provides two testable implications. First, individuals with high risk aversion invest less in risky assets with respect to individuals with low risk aversion. Second, this last effect on employed individuals is mitigated for those protected by a stricter EPL. Our empirical evidence with America data confirms our theoretical implications. We find that individuals experiencing a job loss in the past invest in risky assets 9 percent less at the extensive margin and 23 percent less at the intensive margin with respect to those who do not experience a job loss. By splitting the sample into those who are covered by higher employment protection and those who are not, we find that a higher EPL mitigates the reduction in risky assets induced by a job loss experience.