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Contractual Employment Protection and the Scarring Risk of Unemployment

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Author Info
Elke Jahn () (Institute for Employment Research (IAB), University of Erlangen-Nuremberg and IZA Bonn)
Thomas Wagner () (University of Applied Sciences, Nuremberg)

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Abstract

Risk-averse job seekers fearing the scarring effect of unemployment meet vacancies offering contractual employment protection (CEP) in form of guaranteed employment (GEC) or severance pay contracts (SPC). A GEC fully eliminates both the income risk and the scarring risk of unemployment. SPC diversify the income risk, but provide only limited protection against the scarring risk. (1) Workers strictly prefer contract market to spot market jobs. (2) A higher productivity, a lower probability of demand shocks or of finding a re-employment after a dismissal as well as lower public unemployment benefits increase the fraction of workers concluding a GEC. (3) Although firms are risk-neutral, first-best SPC are not incentive compatible under asymmetric information on the demand for the output of the job. In the second-best equilibrium, a positive fraction of over-insured workers will conclude a GEC, while workers signing a SPC incur income risk. (4) With asymmetric information on the reemployment status of a dismissed worker, employees who conclude a third-best SPC face both uninsurable income risk and the unemployment scar. Workers with a precautionary motive who expect a large or long lasting scar, conclude SPC with wage replacement rates strictly larger than one and low recession wages, which make their jobs more viable.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1813.

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Length: 44 pages
Date of creation: Oct 2005
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Handle: RePEc:iza:izadps:dp1813

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Related research
Keywords: scarring effect of unemployment contractual employment protection guaranteed employment contract severance pay contract implicit contract moral hazard prudence

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Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions
J81 - Labor and Demographic Economics - - Labor Standards - - - Working Conditions

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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.:
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    Other versions:
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  21. Philip Oreopoulos & Marianne Page & Ann Huff Stevens, 2005. "The Intergenerational Effect of Worker Displacement," NBER Working Papers 11587, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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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. Jahn, Elke J. & Wagner, Thomas, 2008. "Job Security as an Endogenous Job Characteristic," Working Papers 08-6, University of Aarhus, Aarhus School of Business, Department of Economics. [Downloadable!]
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