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Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare

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Author Info

  • Cahuc, Pierre

    ()
    (Ecole Polytechnique, Paris)

  • Zylberberg, Andre

    ()
    (Université Paris 1 Panthéon-Sorbonne)

Abstract

It 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 Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 96.

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Length: 32 pages
Date of creation: Dec 1999
Date of revision:
Handle: RePEc:iza:izadps:dp96

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Related research

Keywords: Unemployment; job protection; severance payments; renegotiation;

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Cited by:
  1. Bonin, Holger & Zimmermann, Klaus F., 2000. "The Post-Unification German Labor Market," IZA Discussion Papers 185, Institute for the Study of Labor (IZA).
  2. Fertig, Michael & Schmidt, Christoph M., 2000. "Discretionary Measures of Active Labor Market Policy: The German Employment Promotion Reform in Perspective," IZA Discussion Papers 182, Institute for the Study of Labor (IZA).
  3. Jens Suedekum & Peter Ruehmann, 2003. "Severance Payments and Firm-specific Human Capital," LABOUR, CEIS, vol. 17(1), pages 47-62, 03.
  4. 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.
  5. Bruno Deffains & Yannick Gabuthy & Eve-Angéline Lambert, 2007. "Labor Conflicts and Inefficiency of Relationship-Specific Investments: What is the Judge's Role?," Working Papers of BETA 2007-04, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  6. 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.
  7. Postel-Vinay, Fabien & Turon, Hélène, 2011. "Severance Packages," IZA Discussion Papers 6023, Institute for the Study of Labor (IZA).

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