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Firing tax vs severance payments – an unequal comparison

Author

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  • Dennis Wesselbaum

Abstract

Purpose - – The purpose of this paper is to compare two elements of lay-off costs in a dynamic model of the labor market and analyze the differences for business cycle dynamics and welfare. Design/methodology/approach - – The paper builds a general equilibrium Real Business Cycle model and introduces firing costs and severance payments. Labor market frictions are assumed to follow the famous search and matching approach. Findings - – The paper finds that firing costs imply a higher volatility over the cycle and have stronger negative welfare effects. Severance payments have a lower volatility, reduce unemployment, and reduce welfare by a smaller amount. Practical implications - – Policy reforms should be aimed to use severance payments and reduce the ring cost component of lay-off costs. Originality/value - – Increasing welfare and a more stable business cycle could be supported by using severance payments instead of firing costs.

Suggested Citation

  • Dennis Wesselbaum, 2014. "Firing tax vs severance payments – an unequal comparison," Journal of Economic Studies, Emerald Group Publishing, vol. 41(5), pages 721-736, September.
  • Handle: RePEc:eme:jespps:v:41:y:2014:i:5:p:721-736
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    References listed on IDEAS

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    More about this item

    Keywords

    Welfare; Business cycle; Firing costs; Severance payments; Lay-off costs; Firing tax;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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