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Understanding severance pay

Listed author(s):
  • Donald O. Parsons

    (IZA Bonn, Germany and George Washington University, Economics Department, 2115 G Street NW, Monroe Hall 368, Washington, DC 20052, United States)

Severance pay, a fixed-sum payment to workers at job separation, has been the focus of intense policy concern for the last several decades, but much of this concern is unearned. The design of the ideal separation package is outlined and severance pay emerges as a natural component of job displacement insurance packages, serving both as scheduled reemployment wage insurance and, if search moral hazard is a problem, as scheduled UI. Like any firm-financed separation expenditure, severance pay can induce excessive job retention, but such distortions do not appear to be of practical significance at benefit levels typically mandated in the industrialized world. Moreover there is no evidence that firms attempt to avoid these firing cost distortions by substituting severance savings plans, which have zero firing costs. Indeed severance insurance plans similar to those mandated are often offered voluntarily in the U.S. The appropriate role of government in the market for severance pay is briefly considered.

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File URL: http://zl.elsevier.es/es/revista/cuadernos-economia-329/resumen/comprension-indemnizacion-por-despido-90246903
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Article provided by ELSEVIER in its journal Cuadernos de Economía.

Volume (Year): 36 (2013)
Issue (Month): 102 (Diciembre)
Pages: 155-165

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Handle: RePEc:cud:journl:v:36:y:2013:i:102:p:155-165
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Asociación Cuadernos de Economía Elsevier España, S.L. José Abascal, 45, planta 3ª 28003 Madrid

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  1. Henry S. Farber, 2011. "Job Loss in the Great Recession: Historial Perspective from the Displaced Workers Survey, 1984-2010," Working Papers 1309, Princeton University, Department of Economics, Industrial Relations Section..
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  11. Holzmann, Robert & Pouget, Yann & Vodopivec, Milan & Weber, Michael, 2011. "Severance Pay Programs around the World: History, Rationale, Status, and Reforms," IZA Discussion Papers 5731, Institute for the Study of Labor (IZA).
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  16. Edi Karni, 1999. "Optimal Unemployment Insurance: A Survey," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 442-465, October.
  17. Farber, Henry S, 2011. "Job Loss in the Great Recession: Historical Perspective from the Displaced Workers Survey, 1984-2010," IZA Discussion Papers 5696, Institute for the Study of Labor (IZA).
  18. Martin Neil Baily, 1977. "Unemployment Insurance as Insurance for Workers," ILR Review, Cornell University, ILR School, vol. 30(4), pages 495-504, July.
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