Severance Pay Mandates: Firing Costs, Hiring Costs, and Firm Avoidance Behaviors
AbstractThe potentially adverse labor market effects of severance pay mandates are a continuing source of policy concern. In a seminal study, Lazear (1990) found that contract avoidance of severance pay firing costs was theoretically simple – a bonding scheme would do – but that empirically the labor market distortions were large. Subsequent empirical work resolved the apparent paradox – firing cost effects are modest even without firm avoidance activities. To explore why that should be so, formal measures of severance-induced firing costs and hiring costs are derived. Firing costs are, it turns out, systematically less than benefit generosity alone would imply. Moreover their interrelationship with hiring costs, often employed in empirical studies as a substitute measure, is complex, with co-movements varying in sign and magnitude across policy parameters and the economic environment. Although the analysis assumes a fixed benefit mandate, the cost measures are easily extended to assess the impact of service-linked severance benefits on age-specific employment levels. The model permits design of a cohort-neutral severance mandate – which is not a flat rate structure.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5876.
Length: 32 pages
Date of creation: Jul 2011
Date of revision:
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Find related papers by JEL classification:
- J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-09 (All new papers)
- NEP-BEC-2011-08-09 (Business Economics)
- NEP-HRM-2011-08-09 (Human Capital & Human Resource Management)
- NEP-IAS-2011-08-09 (Insurance Economics)
- NEP-LAB-2011-08-09 (Labour Economics)
- NEP-LMA-2011-08-09 (Labor Markets - Supply, Demand, & Wages)
- NEP-LTV-2011-08-09 (Unemployment, Inequality & Poverty)
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- Parsons, Donald O., 2011. "Mandated Severance Pay and Firing Cost Distortions: A Critical Review of the Evidence," IZA Discussion Papers 5776, Institute for the Study of Labor (IZA).
- Parsons, Donald O., 2011. "Double-Sided Moral Hazard in Job Displacement Insurance Contracts," IZA Discussion Papers 6003, Institute for the Study of Labor (IZA).
- Ferrer, Ana & Riddell, W. Craig, 2011.
"Unemployment Insurance Savings Accounts in Latin America: Overview and Assessment,"
IZA Discussion Papers
5577, Institute for the Study of Labor (IZA).
- Ferrer, Ana M. & Riddell, W. Craig, 2009. "Unemployment insurance savings accounts in Latin America : overview and assessment," Social Protection Discussion Papers 49173, The World Bank.
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