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Do entry wages increase when severance pay drops? Not in recessions

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  • Martins, Pedro S.

Abstract

Severance pay may generate employment effects if wages are rigid. We study this by analysing a reform introduced during a recession that reduced severance pay for new hires while leaving it unchanged for previously-hired employees. We exploit this grandfathering dimension using a regression-discontinuity approach and long monthly data. We find that entry wages did not increase following the reduction in severance. This suggests that severance adjustments over the business cycle may reduce employment fluctuations.

Suggested Citation

  • Martins, Pedro S., 2021. "Do entry wages increase when severance pay drops? Not in recessions," Economics Letters, Elsevier, vol. 201(C).
    • Handle: RePEc:eee:ecolet:v:201:y:2021:i:c:s0165176521000756
    DOI: 10.1016/j.econlet.2021.109798
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    Cited by:

    1. Martins, Pedro S., 2021. "Should the maximum duration of fixed-term contracts increase in recessions? Evidence from a law reform," International Review of Law and Economics, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Employment law; Seasonality; Wage rigidity; Portugal;
    All these keywords.

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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