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Mandatory severance pay : its coverage and effects in Peru

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  • MacIsaac, Donna
  • Rama, Martin

Abstract

In Peru, as in many other developing countries, employers have the legal obligation to compensate workers who are dismissed through no fault of their own. Is this an efficient mechanism for providing income support to the unemployed? The authors seek an answer to this question, using individual records from a household survey with a panel structure. Relying on five coverage indicators, they show that roughly one in five workers in the private sector, and one in three wage earners in the private sector, is legally entitled to severance pay. Coverage is more prevalent among wealthier workers. Results based on several empirical strategies suggest that workers"pay"for their entitlement to severance pay through lower wages. Consumption among unemployed workers who receive severance pay is 20 to 30 percent greater than among those who do not. Consumption among these workers is actually higher than consumption among employed workers, suggesting that mandatory severance pay is overgenerous in Peru.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2626.

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Date of creation: 30 Jun 2001
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Handle: RePEc:wbk:wbrwps:2626

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Related research

Keywords: Public Health Promotion; Labor Policies; Social Protections&Assistance; Wages; Compensation&Benefits; Environmental Economics&Policies; Wages; Compensation&Benefits; Environmental Economics&Policies; Health Monitoring&Evaluation; Social Protections&Assistance; Inequality;

References

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  1. James J. Heckman & Carmen Pages, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," NBER Working Papers 7773, National Bureau of Economic Research, Inc.
  2. Olivier Blanchard & Pedro Portugal, 1998. "What Hides Behind an Umemployment Rate: Comparing Portuguese and U.S. Unemployment," NBER Working Papers 6636, National Bureau of Economic Research, Inc.
  3. Gustavo Márquez & Carmen Pagés-Serra, 1998. "Ties That Bind: Employment Protection and Labor Market Outcomes in Latin America," IDB Publications 4098, Inter-American Development Bank.
  4. Katherine G. Abraham & Susan N. Houseman, 1993. "Does Employment Protection Inhibit Labor Market Flexibility? Lessons from Germany, France and Belgium," Upjohn Working Papers and Journal Articles, W.E. Upjohn Institute for Employment Research 93-16, W.E. Upjohn Institute for Employment Research.
  5. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(3), pages 699-726, August.
  6. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  7. Schaffner, Julie Anderson, 1998. "Premiums to employment in larger establishments: evidence from Peru," Journal of Development Economics, Elsevier, Elsevier, vol. 55(1), pages 81-113, February.
  8. Fallon, Peter R & Lucas, Robert E B, 1991. "The Impact of Changes in Job Security Regulations in India and Zimbabwe," World Bank Economic Review, World Bank Group, World Bank Group, vol. 5(3), pages 395-413, September.
  9. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
  10. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(3), pages 55-74, Summer.
  11. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 192-205, March.
  12. Jaime Saavedra & Alberto Chong, 1999. "Structural reform, institutions and earnings: Evidence from the formal and informal sectors in urban Peru," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(4), pages 95-116.
  13. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 45(1), pages 129-162, December.
  14. Margaret E. Grosh & Paul Glewwe, 1998. "Data Watch: The World Bank's Living Standards Measurement Study Household Surveys," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(1), pages 187-196, Winter.
  15. 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.
  16. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(5), pages 915-38, October.
  17. Haltiwanger, John & Singh, Manisha, 1999. "Cross-Country Evidence on Public Sector Retrenchment," World Bank Economic Review, World Bank Group, World Bank Group, vol. 13(1), pages 23-66, January.
  18. Carmen Pagés-Serra & Gustavo Márquez, 1998. "Ties That Bind: Employment Protection and Labor Market Outcomes in Latin America," Research Department Publications, Inter-American Development Bank, Research Department 4118, Inter-American Development Bank, Research Department.
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Citations

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Cited by:
  1. Martin Rama, 2002. "Mondialisation, inégalités et politiques de l'emploi," Revue d’économie du développement, De Boeck Université, vol. 16(1), pages 43-83.
  2. Brusentsev, Vera & Newhouse, David & Vroman, Wayne, 2012. "Severance pay compliance in Indonesia," Policy Research Working Paper Series 5933, The World Bank.
  3. Vodopivec, Milan, 2009. "Introducing unemployment insurance to developing countries," Social Protection Discussion Papers 49170, The World Bank.
  4. Holzmann, Robert & Pouget, Yann & Vodopivec, Milan & Weber, Michael, 2011. "Severance pay programs around the world : history, rationale, status, and reforms," Social Protection Discussion Papers 62726, The World Bank.

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