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Insuring Displaced Workers: Human Capital Losses and Severance Pay Design

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  • Feng, Shuaizhang

    () (Shanghai University of Finance and Economics)

  • Parsons, Donald O.

    () (George Washington University)

Abstract

Displaced workers, especially long tenured workers, face large human capital losses. Private firms frequently offer insurance against this threat in the form of severance pay – scheduled benefits linked in expectation to the worker’s human capital loss. We explore this linkage, first reviewing common severance benefit algorithms and then comparing them with simple models of capitalized job displacement losses on data from the Displaced Worker Surveys of 2000 and of 2004. The standard benefit formula of one week’s pay per year of service offers payments roughly in proportion to expected capital losses, but with a proportionality factor of only one quarter of capitalized losses (at 9 percent). Despite the systematic relationship between tenure/age and displacement losses, these factors explain little of the total variation in displacement losses, raising obvious insurance efficiency concerns. Cross-sectional estimates from more complete models, however, uncover no admissible factors currently neglected in standard severance contracts, although the jump in earnings losses between displacements in the robust market of 1997-1999 and the difficult labor market of 2000-2003 does suggest conditioning benefits on market conditions.

Suggested Citation

  • Feng, Shuaizhang & Parsons, Donald O., 2006. "Insuring Displaced Workers: Human Capital Losses and Severance Pay Design," IZA Discussion Papers 2238, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2238
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    References listed on IDEAS

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    1. Bruce C. Fallick, 1996. "A Review of the Recent Empirical Literature on Displaced Workers," ILR Review, Cornell University, ILR School, vol. 50(1), pages 5-16, October.
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    More about this item

    Keywords

    job displacement; severance pay; unemployment insurance;

    JEL classification:

    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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