Wage Effects of Non-wage Labour Costs∗

We study wage effects of two important elements of non-wage labour costs: firing costs and payroll taxes. We exploit a reform that introduced substantial reduction in these two provisions for unemployed workers aged less than thirty and over forty-five years who got a permanent job. A matching model with heterogeneous workers predicts positive wage effects of reducing firing costs but ambiguous wage effects of reducing payroll taxes, for both new entrant and incumbent workers. Difference-in-differences estimates and simulation of the model show positive wage effects for both new entrant and incumbent workers. The reduction in firing costs accounts for up to half of the overall wage increase for new entrants but only 10 per cent for incumbents