Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare
AbstractIt is frequently argued that pure government-mandated severance transfers by the employer to the worker have neither employment nor welfare effect because they can be offset by private transfers from the worker to the employer. In this paper, using a dynamic search and matching model à la Mortensen and Pissarides (1994), we show that it may be not any more the case if labor contracts are incomplete and can be renegotiated by mutual agreement only. Indeed, we show that increases in high severance payments are likely to decrease unemployment but systematically decrease welfare and raise inequality. Moreover, it can be understood that insiders try to get high severance payments through political channels, although they do not fight for such a type of advantage at the firm level.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 96.
Length: 32 pages
Date of creation: Dec 1999
Date of revision:
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Other versions of this item:
- Cahuc, Pierre & Zylberberg, André, 2000. "Redundancy payments, incomplete labor contracts, unemployment and welfare," CEPREMAP Working Papers (Couverture Orange) 0006, CEPREMAP.
- H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
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- Garibaldi, Pietro & Violante, Giovanni L, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
- Huang, Chun-chieh & Chang, Juin-jen & Lai, Ching-chong, 2009. "Employment effect of dismissal pay in the presence of judicial mistakes," International Review of Law and Economics, Elsevier, vol. 29(1), pages 38-45, March.
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