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Severance Pay and the Shadow of the Law: Evidence for West Germany

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  • Laszlo Goerke
  • Markus Pannenberg

Abstract

Due to the complexity of employment protection legislation (EPL) in Germany, there is notable uncertainty about the outcomes of dismissal conflicts. In this study we focus on severance pay and inquire whether its incidence and level varies in a systematic manner with the legal rules as defined by labour as well as tax law. We start with a theoretical model that generates the main observable outcomes of dismissal conflicts as potential equilibrium situations. Using German panel data (GSOEP), we put our theoretical model to an empirical test. Our main result is that the shadow of the law matters. Criteria regarding the validity of dismissals either found in respective legislation or defined by labour courts significantly affect the incidence and magnitude of severance pay. Moreover, restrictive changes in the taxation of severance pay have a negative causal impact on its incidence.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.43928.de/dp541.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 541.

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Length: 35 p.
Date of creation: 2005
Date of revision:
Handle: RePEc:diw:diwwpp:dp541

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Keywords: Severance pay; Labour law; Taxation; Sample selection; Survey data;

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References

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  1. Addison, John T. & Bellmann, Lutz & Schnabel, Claus & Wagner, Joachim, 2002. "German works councils old and new: incidence, coverage and determinants," Discussion Papers, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics 10, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
  2. Thomas K. Bauer & Stefan Bender & Holger Bonin, 2007. "Dismissal Protection and Worker Flows in Small Establishments," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 74(296), pages 804-821, November.
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  5. Riphahn, Regina T., 2004. "Employment protection and effort among German employees," Economics Letters, Elsevier, Elsevier, vol. 85(3), pages 353-357, December.
  6. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262232588, December.
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  8. Levine, David I, 1989. "Just-Cause Employment Policies When Unemployment Is a Worker Discipline Device," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 902-05, September.
  9. Wooldridge, Jeffrey M., 2007. "Inverse probability weighted estimation for general missing data problems," Journal of Econometrics, Elsevier, Elsevier, vol. 141(2), pages 1281-1301, December.
  10. Miguel �. Malo, 2000. "A Simple Model of Severance Pay Determination: The Case of Individual Dismissals in Spain," LABOUR, CEIS, CEIS, vol. 14(2), pages 269-290, 06.
  11. Jeffrey M. Wooldridge, 1999. "Asymptotic Properties of Weighted M-Estimators for Variable Probability Samples," Econometrica, Econometric Society, Econometric Society, vol. 67(6), pages 1385-1406, November.
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  14. Verick, Sher, 2004. "Threshold Effects of Dismissal Protection Legislation in Germany," IZA Discussion Papers 991, Institute for the Study of Labor (IZA).
  15. José Enrique Galdón Sánchez & Maia Güell, 2001. "Dismissal conflicts and unemployment," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra, Departamento de Economía - Universidad Pública de Navarra 0105, Departamento de Economía - Universidad Pública de Navarra.
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Cited by:
  1. Berger, Helge & Neugart, Michael, 2011. "Labor courts, nomination bias, and unemployment in Germany," European Journal of Political Economy, Elsevier, Elsevier, vol. 27(4), pages 659-673.
  2. Moser, Christoph & Urban, Dieter M & Weder di Mauro, Beatrice, 2008. "International Competitiveness, Job Creation and Job Destruction - An Establishment Level Study of German Job Flows," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6745, C.E.P.R. Discussion Papers.
  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, Springer, vol. 23(2), pages 151-167, April.

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