May 2012

IZA DP No. 6608: Employment Protection and Fertility: Evidence from the 1990 Italian Reform

published in: Labour Economics, 2013, 23, 77-88

The aim of this paper is to investigate the effect of Employment Protection Legislation (EPL) on fertility decisions of Italian working women using administrative data. We exploit a reform that introduced in 1990 costs for dismissals unmotivated by a 'fair cause' or 'justified motive' in firms below 15 employees and left firing costs unchanged for bigger firms. We use this quasi-experimental setup to study the hypothesis that increased EPL reduces future job insecurity and positively affects a female worker's proneness to take childbearing decisions. We use a difference in difference (OLS-DID) model to control for possible period-invariant sorting bias and an instrumental variable (IV-DID) model to account for time-varying endogeneity of the treatment status. We find that reduced economic insecurity following a strengthening of the EPL regime has a positive and sizable effect on fertility decisions of Italian working women. This result is robust to a number of checks regarding possible interactions with other policy reforms occurring around 1990, changes in the sample of workers and firms, and use of an alternative set of exclusion restrictions.