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The Allocation of the Cost of Displaced Labor and Severance Pay

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  • Vladimir Stoikov

Abstract

This paper analyzes the allocation of the costs of labor displacement from the viewpoints of economic efficiency and social justice. Commencing with a model assuming perfect knowledge of expected employment change-that of seasonal variations in employment-it examines the effect of this knowledge on an industry's expected labor supply price. Then, using a more realistic model of unpredictable employment changes, it considers the compensation for unexpected layoffs that is necessary for efficient resource allocation. Both models are modified by the restrictions of pure seniority systems to explore further the effects of these and other forms of seniority preference on layoff probability, unemployment compensation, and mobility preference. The major conclusion of the analysis is that, under specified conditions, workers permanently laid off should be compensated by their employers for the equity they have accumulated. The paper concludes with some observations on implications of the analysis for severance pay.

Suggested Citation

  • Vladimir Stoikov, 1969. "The Allocation of the Cost of Displaced Labor and Severance Pay," Journal of Human Resources, University of Wisconsin Press, vol. 4(2), pages 192-204.
    • Handle: RePEc:uwp:jhriss:v:4:y:1969:i:2:p:192-204
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