The response of wages to protective labor legislation: Evidence from Canada

Using micro data from the 1986-87 Canadian Labour Market Activity Survey, the author examines the wage effect of laws requiring advance notice of layoffs and in some cases also requiring severance payments to laid-off workers. The results suggest that incumbent workers protected by advance notice and severance pay laws were able to extract higher wages than were incumbent workers unprotected by such laws. There is evidence, however, that the ultimate wage effect differed by workers' union status: starting wages of nonunion workers appear to have fallen to offset the subsequent wage increase, indicating that nonunion workers may ''pay for'' advance notice and severance pay laws, whereas union workers who were protected by such laws seem to have been able to exploit their bargaining position to increase their lifetime earnings.