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Labor-market Frictions, Incomplete Insurance and Severance Payments

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  • Etienne Lale

    (UQAM)

Abstract

We analyze the effects of government-mandated severance payments in a rich life-cycle model with search-matching frictions in the labor market, risk-averse agents and imperfect insurance against idiosyncratic shocks. Our model emphasizes a tension between worker-firm wage bargains and consumption smoothing: entry wages respond to expected future severance payments by tilting downwards, which runs counter to having a smooth consumption path. Quantitatively, we find that these wage-shifting effects are sizable enough for severance payments to produce large welfare losses. Our assessment contrasts sharply with previous studies that restricted the extent of worker-firm bargaining to analyze the welfare implications of severance payments. (Copyright: Elsevier)

Suggested Citation

  • Etienne Lale, 2019. "Labor-market Frictions, Incomplete Insurance and Severance Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 411-435, January.
    • Handle: RePEc:red:issued:16-237
    DOI: 10.1016/j.red.2018.10.001
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    Cited by:

    1. Juan J. Dolado & Etienne Lalé & Nawid Siassi, 2021. "From dual to unified employment protection: Transition and steady state," Quantitative Economics, Econometric Society, vol. 12(2), pages 547-585, May.
    2. Rafael Azevedo & Luis Bettoni & Marcelo Santos, 2024. "Severance savings accounts and life-cycle savings," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(4), pages 1275-1331, December.

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    More about this item

    Keywords

    Severance payments; Labor-market frictions; precautionary savings; welfare;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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