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Firing Tax and Severance Payment in Search Economies: A Comparison

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  • Garibaldi, Pietro
  • Violante, Giovanni L

Abstract

Employment Protection rules have two separate dimensions: a transfer from the firm to the worker to be laid off and a tax paid outside the firm-worker pair. It is well established that with full wage flexibility statutory severance payments (pure transfers) between employers and dismissed employees are neutral (Lazear 1988, 1990). Most of the existing literature makes the implicit assumption that, in the presence of wage rigidity, such mandatory transfers have the same real effects as firing taxes. This Paper shows, in the context of a search model, that this presumption is in general misplaced. It is only correct in the case of extreme wage rigidity, whereas when some (but not full) flexibility in the wage setting at the level of an individual employer-worker match is allowed, the impact of severance payments on unemployment duration and incidence is qualitatively different from that of firing taxes (and its sign depends on the nature of the wage rigidity).

Suggested Citation

  • Garibaldi, Pietro & Violante, Giovanni L, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3636
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pilar García-Martínez & Miguel Malo, 2007. "The strategic use of dismissal legislation: an empirical analysis using Spanish data," European Journal of Law and Economics, Springer, vol. 23(2), pages 151-167, April.
    2. Burguet, Roberto & Caminal, Ramon, 2008. "Does the market provide sufficient employment protection?," Labour Economics, Elsevier, vol. 15(3), pages 406-422, June.
    3. Victoria Osuna & Jose-Ignacio García-Pérez, 2012. "The effects of introducing a single open-ended contract in Spain," EcoMod2012 3825, EcoMod.
    4. Arnaud Chéron & Jean-Olivier Hairault & François Langot, 2009. "The Role of Institutions in Transatlantic Employment Differences: A Life-Cycle View," Annals of Economics and Statistics, GENES, issue 95-96, pages 121-138.
    5. Usui, Emiko, 2007. "Severance payments in equilibrium unemployment," Economics Letters, Elsevier, vol. 94(3), pages 342-347, March.
    6. Parello, Carmelo Pierpaolo, 2011. "Labor market rigidity and productivity growth in a model of innovation-driven growth," Economic Modelling, Elsevier, vol. 28(3), pages 1058-1067, May.
    7. Ferrari, Filippo, 2011. "Lo sviluppo delle competenze nei contesti precari
      [Skills development in precariousness: the dark side of flexibility?]
      ," MPRA Paper 33284, University Library of Munich, Germany.
    8. Bolli, Thomas & Kemper, Johanna, 2015. "Evaluating the Impact of Employment Protection on Firm-Provided Training in an RDD Framework," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112895, Verein für Socialpolitik / German Economic Association.
    9. Wang, Cheng, 2006. "Equilibrium Layoff As Termination of a Dynamic Contract," Staff General Research Papers Archive 12704, Iowa State University, Department of Economics.
    10. Hairault, Jean-Olivier & Chéron, Arnaud & Langot, François, 2007. "Job Creation and Job Destruction over the Life Cycle: The Older Workers in the Spotlight," IZA Discussion Papers 2597, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    firing tax; severance payment; unemployment; wage rigidity;

    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
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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