Earnings-Related Severance Pay
In an efficiency wage economy, lump-sum severance pay from which shirkers can be excluded raises employment. However, severance payments are usually related to wages. It is shown that earnings-related, mandated severance pay will have ambiguous employment effects if effort can be varied continuously. A substitution of the earnings-related for the lump-sum component reduces employment. Thus, the prevalent form of severance payments in OECD countries might have less advantageous employment effects than previously conjectured.
|Date of creation:||Jul 2006|
|Publication status:||published in: Labour, 2006, 20 (4), 651-672|
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