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Do firms obey the law when they fire workers? Social criteria and severance payments in Germany

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Author Info

  • Elke J. Jahn

Abstract

Purpose – Employment protection legislation defines social criteria according to which firms can dismiss workers. If firms evade the law, then negotiation about compensation begins. To reduce the legal and financial uncertainty often associated with ex post bargaining, the German government stipulate severance payments in the case of mutual agreements in law in 2004. This paper aims to examine whether social criteria affect the dismissal probability of workers. Design/methodology/approach – The probability of receiving compensation and the factors determining the amount of severance payment are estimated when it comes to private negotiations about the termination of an employment contract. In addition, the effect of the reform of the employment protection legislation on the probability of receiving compensation and the amount of redundancy pay is analysed. A stepwise estimation strategy is developed to account for sample selection bias when examining which workers receive severance payments and the determinants of severance pay variation. Empirical evidence is provided using German panel data for the period 2000-2006. Findings – The paper shows that workers protected by law have the lowest probability of being dismissed. The expected severance payment and firm size increase the probability of receiving compensation while the amount of severance payment depends significantly on the way the employment relationship is dissolved. Contrary to the intention of the legislator, the reform increases the level of compensation. Originality/value – The paper fills a gap in the literature by taking into account selectivity bias when estimating the probability of receiving redundancy pay and the size of compensation. The evidence also provides insights which may be useful for the ongoing discussion to reform employment protection legislation in Germany.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal International Journal of Manpower.

Volume (Year): 30 (2009)
Issue (Month): 7 (November)
Pages: 672-691

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Handle: RePEc:eme:ijmpps:v:30:y:2009:i:7:p:672-691

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Related research

Keywords: Collective bargaining; Employment legislation; Employment protection; Germany; Severance;

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Cited by:
  1. Goerke, Laszlo & Pannenberg, Markus, 2009. "An economic analysis of dismissal legislation: Determinants of severance pay in West Germany," Center for European, Governance and Economic Development Research Discussion Papers 87, University of Goettingen, Department of Economics.
  2. Stephan Dlugosz & Gesine Stephan & Ralf A. Wilke, . "Fixing the leak: Unemployment incidence before and after the 2006 reform of unemployment benefits in Germany," Discussion Papers 09/10, University of Nottingham, School of Economics.
  3. Goerke, Laszlo & Pannenberg, Markus, 2010. "Trade Union Membership and Dismissals," IZA Discussion Papers 5222, Institute for the Study of Labor (IZA).
  4. Laszlo Goerke & Markus Pannenberg, 2010. "'Take it or Go to Court' - The Impact of Sec. 1a of the German Protection against Dismissal Act on Severance Payments -," CESifo Working Paper Series 3120, CESifo Group Munich.
  5. Danielle Venn, 2009. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators," OECD Social, Employment and Migration Working Papers 89, OECD Publishing.

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