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Understanding Severance Pay

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  • Parsons, Donald O.

    ()
    (George Washington University)

Abstract

Severance pay, a fixed-sum payment to workers at job separation, has been the focus of intense policy concern for the last several decades, but much of this concern is unearned. The design of the ideal separation package is outlined and severance pay emerges as a natural component of job displacement insurance packages, serving both as scheduled reemployment wage insurance and, if search moral hazard is a problem, as scheduled UI. Like any firm-financed separation expenditure, severance pay can induce excessive job retention, but such distortions do not appear to be of practical significance at benefit levels typically mandated in the industrialized world. Moreover there is no evidence that firms attempt to avoid these firing cost distortions by substituting severance savings plans, which have zero firing costs. Indeed severance insurance plans similar to those mandated are often offered voluntarily in the U.S. The appropriate role of government in the market for severance pay is briefly considered.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7641.

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Length: 31 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7641

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Related research

Keywords: unemployment insurance; firing costs; job displacement; severance pay; moral hazard;

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References

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  1. Abidoye, Babatunde & Orazem, Peter & Vodopivec, Milan, 2008. "Firing Cost and Firm Size: A Study of Sri Lanka's Severance Pay System," Staff General Research Papers 12922, Iowa State University, Department of Economics.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Why severance pay?
    by Economic Logician in Economic Logic on 2013-11-14 14:46:00

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