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Introducing Severance Payment Systems in Japan ——A Proposal for Vacancy Decontrol——

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  • Hatta, Tatsuo

Abstract

In Japan, the court requires job restoration rather than a severance payment from a firm after it decides that a dismissal has been abusive. This results in a high settlement cost for termination. This paper makes two proposals for introducing severance payments to reduce settlement costs in Japan. The first applies to existing contracts and proposes to specify levels of severance payments that would replace the current job restoration requirement after the court determines that a case is abusive. The second applies to new employees either for a recently vacated position or a new position and proposes vacancy decontrol, which allows firms to set the levels of severance payments freely while also honoring the existing contracts. Within this category, this paper proposes government-assisted vacancy decontrol, a transitional measure, where the government sets a minimum level of statutory severance payment, which is equal to six months of wages for a worker who has worked for 20 years, following the Taiwan precedent. After the need for the transitional measure is dissolved, complete vacancy decontrol should be introduced, abolishing the statutory severance payment. We have proposed that even at this stage, the government should publicly set a default level of the severance payment, which a firm should observe unless an explicit agreement or contract stipulates otherwise. The government should immediately introduce some form of vacancy decontrol for senior workers who have already retired from a regular job.

Suggested Citation

  • Hatta, Tatsuo, 2018. "Introducing Severance Payment Systems in Japan ——A Proposal for Vacancy Decontrol——," AGI Working Paper Series 2018-06, Asian Growth Research Institute.
  • Handle: RePEc:agi:wpaper:00000142
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    File URL: http://id.nii.ac.jp/1270/00000142/
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    More about this item

    Keywords

    Dismissal regulation; vacancy decontrol; severance payment; Taiwan; exit payment; job restoration requirement; lifetime employment; Ponzi scheme; rapid economic growth; incomplete contract; human capital investment; Labor Standard Act; unemployment insurance; employment-at-will; seniority-based wage system; J08; J38; J41; J48; J88; J83; K12; K31; K41; D61;

    JEL classification:

    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy
    • J88 - Labor and Demographic Economics - - Labor Standards - - - Public Policy
    • J83 - Labor and Demographic Economics - - Labor Standards - - - Workers' Rights
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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