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Earnings-related Severance Pay

  • Laszlo Goerke

In an efficiency wage economy, lump-sum severance pay from which shirkers can be excluded raises employment. However, severance payments are usually related to wages. It is shown that earnings-related, mandated severance pay will have ambiguous employment effects if effort can be varied continuously. A substitution of the earnings-related for the lump-sum component reduces employment. Thus, the prevalent form of severance payments in OECD countries might have less advantageous employment effects than previously conjectured. Copyright 2006 The Author; Journal compilation 2006 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd..

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Article provided by CEIS in its journal LABOUR.

Volume (Year): 20 (2006)
Issue (Month): 4 (December)
Pages: 651-672

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Handle: RePEc:bla:labour:v:20:y:2006:i:4:p:651-672
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