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Firing Tax and Severance Payment in Search Economies: A Comparison

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Author Info
Garibaldi, Pietro
Violante, Giovanni L

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Abstract

Employment Protection rules have two separate dimensions: a transfer from the firm to the worker to be laid off and a tax paid outside the firm-worker pair. It is well established that with full wage flexibility statutory severance payments (pure transfers) between employers and dismissed employees are neutral (Lazear 1988, 1990). Most of the existing literature makes the implicit assumption that, in the presence of wage rigidity, such mandatory transfers have the same real effects as firing taxes. This Paper shows, in the context of a search model, that this presumption is in general misplaced. It is only correct in the case of extreme wage rigidity, whereas when some (but not full) flexibility in the wage setting at the level of an individual employer-worker match is allowed, the impact of severance payments on unemployment duration and incidence is qualitatively different from that of firing taxes (and its sign depends on the nature of the wage rigidity).

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3636.

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Date of creation: Nov 2002
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Handle: RePEc:cpr:ceprdp:3636

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Related research
Keywords: firing tax; severance payment; unemployment; wage rigidity;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June. [Downloadable!] (restricted)
  2. Maia Guell, 2000. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 812, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  3. Bentolila, Samuel & Saint-Paul, Gilles, 1994. "A model of labor demand with linear adjustment costs," Labour Economics, Elsevier, vol. 1(3-4), pages 303-326, September. [Downloadable!] (restricted)
    Other versions:
  4. Maia Güell, 2000. "Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis," CEP Discussion Papers dp0461, Centre for Economic Performance, LSE. [Downloadable!]
  5. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October. [Downloadable!] (restricted)
  6. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 381-402, July. [Downloadable!] (restricted)
  7. repec:fth:prinin:444 is not listed on IDEAS
  8. Ljungqvist, Lars, 2001. "How Do Layoff Costs Affect Employment?," IZA Discussion Papers 403, Institute for the Study of Labor (IZA). [Downloadable!]
  9. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
    Other versions:
  10. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October. [Downloadable!] (restricted)
    Other versions:
  11. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June. [Downloadable!] (restricted)
  12. Christopher L. Erikson & Andrea Ichino, 1994. "Wage Differentials in Italy: Market Forces, Institutions, and Inflation," NBER Working Papers 4922, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Iversen, Torben, 1998. "Wage Bargaining, Central Bank Independence, and the Real Effects of Money," International Organization, MIT Press, vol. 52(3), pages 469-504, Summer.
  14. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August. [Downloadable!] (restricted)
  15. repec:fth:prinin:433 is not listed on IDEAS
  16. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," Review of Economic Studies, Blackwell Publishing, vol. 71(1), pages 43-61, 01. [Downloadable!] (restricted)
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  17. Giulio Fella, 1999. "When Do Firing Costs Matter?," Working Papers 400, Queen Mary, University of London, Department of Economics. [Downloadable!]
  18. Jose Galdon-Sanchez & Maia Guell, 2000. "Let's go to court! Firing costs and dismissal conflicts," Working Papers 823, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  19. Pierre Cahuc & André Zylberberg, 1999. "Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare," IZA Discussion Papers 96, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  20. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  21. McLaughlin, Kenneth J, 1991. "A Theory of Quits and Layoffs with Efficient Turnover," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 1-29, February. [Downloadable!] (restricted)
  22. Iversen, Torben, 1998. "Wage Bargaining, Central Bank Independence, and the Real Effects of Money," International Organization, Cambridge University Press, vol. 52(03), pages 469-504, July. [Downloadable!]
  23. Pietro Garibaldi & Paolo Mauro, 2002. "Anatomy of employment growth," Economic Policy, CEPR, CES, MSH, vol. 17(34), pages 67-114, 04. [Downloadable!] (restricted)
  24. Ljungqvist, Lars, 2001. "How Do Layoff Costs Affect Employment?," CEPR Discussion Papers 3051, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pilar García-Martínez & Miguel Malo, 2007. "The strategic use of dismissal legislation: an empirical analysis using Spanish data," European Journal of Law and Economics, Springer, vol. 23(2), pages 151-167, April. [Downloadable!] (restricted)
  2. Burguet, Roberto & Caminal, Ramón, 2004. "Does the Market Provide Sufficient Employment Protection?," CEPR Discussion Papers 4198, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Wang, Cheng, 2006. "Equilibrium Layoff as Termination of a Dynamic Contract," Staff General Research Papers 12704, Iowa State University, Department of Economics. [Downloadable!]
  4. Jean-Olivier Hairault & Arnaud Chéron & François Langot, 2007. "Job Creation and Job Destruction over the Life Cycle: The Older Workers in the Spotlight," IZA Discussion Papers 2597, Institute for the Study of Labor (IZA). [Downloadable!]
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