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Firing Tax and Severance Payment in Search Economies: A Comparison

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  • Garibaldi, Pietro
  • Violante, Giovanni L

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

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References

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  18. Cahuc, Pierre & Zylberberg, André, 2000. "Redundancy payments, incomplete labor contracts, unemployment and welfare," CEPREMAP Working Papers (Couverture Orange) 0006, CEPREMAP.
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Citations

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Cited by:
  1. Parello, Carmelo Pierpaolo, 2011. "Labor market rigidity and productivity growth in a model of innovation-driven growth," Economic Modelling, Elsevier, vol. 28(3), pages 1058-1067, May.
  2. Wang, Cheng, 2006. "Equilibrium Layoff As Termination of a Dynamic Contract," Staff General Research Papers 12704, Iowa State University, Department of Economics.
  3. 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.
  4. Usui, Emiko, 2007. "Severance payments in equilibrium unemployment," Economics Letters, Elsevier, vol. 94(3), pages 342-347, March.
  5. Burguet, Roberto & Caminal, Ramón, 2004. "Does the Market Provide Sufficient Employment Protection?," CEPR Discussion Papers 4198, C.E.P.R. Discussion Papers.
  6. Arnaud CHÉRON & Jean-Olivier HAIRAULT & François LANGOT, 2009. "The Role of Institutions in Transatlantic Employment Differences: A Life-Cycle View," Annales d'Economie et de Statistique, ENSAE, issue 95-96, pages 121-138.
  7. Hairault, Jean-Olivier & Chéron, Arnaud & Langot, François, 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).
  8. Ferrari, Filippo, 2011. "Lo sviluppo delle competenze nei contesti precari
    [Skills development in precariousness: the dark side of flexibility?]
    ," MPRA Paper 33284, University Library of Munich, Germany.

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