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Firing cost and firm size : a study of Sri Lanka's severance pay system

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  • Abidoye, Babatunde
  • Orazem, Peter F.
  • Vodopivec, Milan

Abstract

Consistent with its focus on social policies, Sri Lanka has devoted significant attention to worker protection. One of the main pillars of its worker protection policy is the Termination of Employment of Workman Act (TEWA) introduced in 1971. The act aims to limit unemployment by raising the cost of layoffs. The act requires that each layoff of a covered worker, whether individual or as a part of a mass layoff, must be approved by the government. Until recently, the government also decided on a case-by-case basis the level of severance pay the firm had to pay to the laid off workers. Since its introduction, critics have argued that the TEWA's non-transparent, discretionary, and costly regulations discourage employment growth, hinder reallocation of labor from inefficient firms to more profitable sectors, slow the introduction of new technologies, and increase unemployment. Defenders including trade unions and the government argue that on the contrary, severance pay promotes longer-lasting employment relationships that improve incentives for training and enhance cooperation and trust between employers and workers. The paper is organized as follows: section two provides an institutional background, highlighting the intensions of the TEWA at its introduction, and it's the provisions and procedures. Section three presents the theoretical framework and formulates hypotheses to be empirically tested. Section four describes the data and the identification strategy devised to identify the employment effects of TEWA. Section five presents the empirical results based on the estimation of the multinomial model of employment growth of firms. Section six concludes witha summary and policy recommendations.

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Bibliographic Info

Paper provided by The World Bank in its series Social Protection Discussion Papers with number 50671.

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Date of creation: 01 Sep 2009
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Handle: RePEc:wbk:hdnspu:50671

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Keywords: Labor Markets; Microfinance; Labor Policies; Emerging Markets; Small Scale Enterprise;

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References

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  1. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
  2. Carmen Pagés-Serra & James J. Heckman, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Research Department Publications 4227, Inter-American Development Bank, Research Department.
  3. Richard Freeman, 2008. "Labor Market Institutions Around the World," CEP Discussion Papers dp0844, Centre for Economic Performance, LSE.
  4. Ahsan, Ahmad & Pages, Carmen, 2007. "Are all labor regulations equal ? Assessing the effects of job security, labor dispute, and contract labor laws in India," Policy Research Working Paper Series 4259, The World Bank.
  5. Andrew Glyn, 2003. "Labor Market Institutions and Unemployment: A Critical Assessment of the Cross-Country Evidence," Economics Series Working Papers 168, University of Oxford, Department of Economics.
  6. Liedholm, Carl & Mead, Donald C., 1987. "Small Scale Industries in Developing Countries: Empirical Evidence and Policy Implications," Food Security International Development Papers 54062, Michigan State University, Department of Agricultural, Food, and Resource Economics.
  7. Addison, John T. & Teixeira, Paulino, 2001. "The Economics of Employment Protection," IZA Discussion Papers 381, Institute for the Study of Labor (IZA).
  8. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
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Citations

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Cited by:
  1. Vodopivec, Milan, 2009. "Introducing unemployment insurance to developing countries," Social Protection Discussion Papers 49170, The World Bank.
  2. Luis Garicano & Claire Lelarge & John Van Reenen, 2012. "Firm Size Distortions and the Productivity Distribution: Evidence from France," CEP Discussion Papers dp1128, Centre for Economic Performance, LSE.
  3. David McKenzie, 2010. "Impact Assessments in Finance and Private Sector Development: What Have We Learned and What Should We Learn?," World Bank Research Observer, World Bank Group, vol. 25(2), pages 209-233, August.
  4. Piggott, John & Sane, Renuka, 2009. "Indexing pensions," Social Protection Discussion Papers 52445, The World Bank.
  5. Woo, Kye Lee, 2009. "Productivity increases in SMEs : with special emphasis on in-service training of workers in Korea," Social Protection Discussion Papers 51251, The World Bank.
  6. Almeida, Rita K. & Susanli, Z. Bilgen, 2011. "Firing Regulations and Firm Size in the Developing World: Evidence from Differential Enforcement," IZA Discussion Papers 6006, Institute for the Study of Labor (IZA).
  7. Parsons, Donald O., 2013. "Understanding Severance Pay," IZA Discussion Papers 7641, Institute for the Study of Labor (IZA).
  8. Ra, Young-Sun & Shim, Kyung Woo, 2009. "The Korean case study : past experience and new trends in training policies," Social Protection Discussion Papers 53696, The World Bank.
  9. Holzmann, Robert, 2010. "Bringing financial literacy and education to low and middle income countries : the need to review, adjust, and extend current wisdom," Social Protection Discussion Papers 56501, The World Bank.
  10. Chae, ChangKyun & Chung, Jaeho, 2009. "Pre-employment vocational education and training in Korea," Social Protection Discussion Papers 52186, The World Bank.
  11. Lord, Janet & Posarac, Aleksandra & Nicoli, Marco & Peffley, Karen & Mcclain-Nhlapo, Charlotte & Keogh, Mary, 2010. "Disability and international cooperation and development : a review of policies and practices," Social Protection Discussion Papers 56092, The World Bank.
  12. 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).
  13. Danielle Venn, 2009. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators," OECD Social, Employment and Migration Working Papers 89, OECD Publishing.
  14. James, Estelle, 2009. "Rethinking survivor benefits," Social Protection Discussion Papers 52919, The World Bank.

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