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Job Displacement Risk and Severance Pay

Author

Listed:
  • Giulio Fella

    (Centre for Macroeconomics (CFM)
    Institute for Fiscal Studies
    School of Economics and Finance Queen Mary)

  • Marco Cozzi

    (Department of Economics University of Victoria)

Abstract

This paper is a quantitative, equilibrium study of the insurance role of severance pay when workers face displacement risk and markets are incomplete. A key feature of our model is that, in line with an established empirical literature, job displacement entails a persistent fall in earnings upon re-employment due to the loss of tenure. The model is solved numerically and calibrated to the US economy. In contrast to previous studies that have analyzed severance payments in the absence of persistent earning losses, we find that the welfare gains from the insurance against job displacement afforded by severance pay are sizable.

Suggested Citation

  • Giulio Fella & Marco Cozzi, 2016. "Job Displacement Risk and Severance Pay," Discussion Papers 1615, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1615
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    References listed on IDEAS

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    5. Barceló, Cristina & Villanueva, Ernesto, 2016. "The response of household wealth to the risk of job loss: Evidence from differences in severance payments," Labour Economics, Elsevier, vol. 39(C), pages 35-54.
    6. Donald O. Parsons, 2023. "How should job displacement wage losses be insured?," IZA World of Labor, Institute of Labor Economics (IZA), pages 446-446, July.
    7. Donald O. Parsons, 2018. "Compensating displaced workers," IZA World of Labor, Institute of Labor Economics (IZA), pages 444-444, September.
    8. Parsons, Donald O., 2017. "Voluntary Employer-Provided Severance Pay," IZA Discussion Papers 11067, Institute of Labor Economics (IZA).
    9. Sahin Avcioglu & Bilgehan Karabay, 2020. "Labor market regulation under self‐enforcing contracts," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 1965-2018, December.
    10. Cristina Lafuente, 2018. "Search capital and Unemployment Duration," 2018 Meeting Papers 427, Society for Economic Dynamics.
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    More about this item

    Keywords

    Severance Payments; Incomplete Markets; Welfare;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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