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Do Larger Severance Payments Increase Individual Job Duration?

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  • Garibaldi, Pietro
  • Pacelli, Lia

Abstract

This Paper analyses the effect of severance payments on the probability of separation at given tenure, wages and other individual and firm characteristics. It studies a mandatory deferred wage scheme of the Italian labour market (Trattamento di Fine Rapporto, TFR). Deferred wages increase job duration if two conditions hold: wages are rigidly set outside the employer-employee relationship, and past provisions are accumulated at interest rates that are below market rates. Under such circumstances, workers who withdraw from their accumulated stock of unpaid wages should experience, at given tenure, a subsequent increase in the probability of separation. This prediction appears empirically robust and quantitatively sizeable. A withdraw of 60% of the TFR stock (the median observed withdraw) increases the instantaneous hazard rate by almost 20%. In other words, an individual with at least ten years of tenure that experiences an early withdrawal increases his/her hazard rate from 10% to about 12%. A variety of robustness tests support these results.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4607.

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Date of creation: Sep 2004
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Handle: RePEc:cpr:ceprdp:4607

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Keywords: employment protection legislation; severence payments;

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References

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  1. Farber, Henry S., 1999. "Mobility and stability: The dynamics of job change in labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 37, pages 2439-2483 Elsevier.
  2. Bertola, Giuseppe, 1999. "Microeconomic perspectives on aggregate labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 45, pages 2985-3028 Elsevier.
  3. Jenkins, Stephen P, 1995. "Easy Estimation Methods for Discrete-Time Duration Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(1), pages 129-38, February.
  4. Joel Horowitz & Sokbae 'Simon' Lee, 2002. "Semiparametric estimation of a panel data proportional hazards model with fixed effects," CeMMAP working papers CWP21/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  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.
  6. Pietro Garibaldi & Lia Pacelli & Andrea Borgarello, 2004. "Employment Protection Legislation and the Size of Firms," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 63(1), pages 33-68, April.
  7. Devicenti francesco & Maida Agata & Pacelli Lia, 2005. "The Resurrection of the Italian Wage Curve," Department of Economics and Statistics Cognetti de Martiis. Working Papers 200502, University of Turin.
  8. Ichino, Andrea & Polo, Michele & Rettore, Enrico, 2003. "Are judges biased by labor market conditions?," European Economic Review, Elsevier, vol. 47(5), pages 913-944, October.
  9. Garibaldi, Pietro & Violante, Giovanni L, 2004. "The Employment Effects of Severance Payments with Wage Rigidities," CEPR Discussion Papers 4608, C.E.P.R. Discussion Papers.
  10. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
  11. Jaap H. Abbring & Gerard J. van den Berg, 2003. "The Nonparametric Identification of Treatment Effects in Duration Models," Econometrica, Econometric Society, vol. 71(5), pages 1491-1517, 09.
  12. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
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Citations

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Cited by:
  1. Antonio Romero-Medina & Matteo Triossi, 2011. "Games with Capacity Manipulation: Incentives and Nash Equilibria," Documentos de Trabajo 280, Centro de Economía Aplicada, Universidad de Chile.
  2. Ashok Thomas & Luca Spataro, 2013. "Pension funds and Market Efficiency: A review," Discussion Papers 2013/164, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  3. Riccardo Calcagno & Roman Kraeussl & Chiara Monticone, 2011. "An analysis of the effects of the severance payment reform on credit to Italian SMEs," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(3), pages 243-261, August.
  4. repec:dgr:uvatin:2008107 is not listed on IDEAS
  5. Vincenzo Carrieri & Cinzia Di Novi & Rowena Jacobs & Silvana Robone, 2012. "Well-being and psychological consequences of temporary contracts: the case of younger Italian employees," Working Papers 079cherp, Centre for Health Economics, University of York.
  6. Naticchioni Paolo & Rustichelli Emiliano & Scialà Antonio, 2006. "Employment Protection and Regional Worker Flows in Italy," Economia politica, Società editrice il Mulino, issue 3, pages 453-474.
  7. Carolina Fugazza, 2011. "Tracking the Italian employees'TFR over their working life careers," CeRP Working Papers 125, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  8. Steffen Ahrens & Dennis Wesselbaum, 2009. "On the Introduction of Firing Costs," Kiel Working Papers 1559, Kiel Institute for the World Economy.
  9. Grassi, Emanuele, 2009. "EPL and Job Contract Conversion Rate: The Italian CFL Case," MPRA Paper 12679, University Library of Munich, Germany.

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