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Employment protection and incentives: Severance pay vs. procedural inconvenience

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  • Eguchi, Kyota

Abstract

I consider the effects of employment protection (EP) on worker incentives in the labor market with search friction, where EP is categorized into severance pay (SP) and procedural inconvenience (PI). When firms cannot distinguish shirkers, EP seems to negatively affect worker incentives, because shirkers are unlikely to be fired. However, EP can have a positive effect on worker incentives because diligent workers are protected by EP. It is shown that the positive effect can dominate the negative one when EP is moderate. In particular, PI tends to improve the unemployment rate and welfare, while SP has a somewhat unclear effect.

Suggested Citation

  • Eguchi, Kyota, 2014. "Employment protection and incentives: Severance pay vs. procedural inconvenience," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 272-290.
    • Handle: RePEc:eee:jjieco:v:34:y:2014:i:c:p:272-290
    DOI: 10.1016/j.jjie.2014.09.001
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    More about this item

    Keywords

    Worker incentives; Search friction; Commitment;
    All these keywords.

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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