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The Firing Cost Implications of Alternative Severance Pay Designs

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  • Parsons, Donald O.

    () (George Washington University)

Abstract

Economists have concerns about the firing cost implications of mandated severance plans. Analysis reveals that predicted severance plan consequences depend critically on the precise structure of the plan. Whether governments mandate (i) severance insurance plans or (ii) severance savings plans is important; savings plans have no "firing cost" effects on employer layoff decisions. The firing cost implications of insurance plan are sensitive to the types of job separations that qualify a worker for benefits. Plans that pay benefits across all separations are functionally severance savings plans. The variety of plan types is illustrated using U.S. and international examples.

Suggested Citation

  • Parsons, Donald O., 2010. "The Firing Cost Implications of Alternative Severance Pay Designs," IZA Discussion Papers 4967, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp4967
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    References listed on IDEAS

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    1. James J. Heckman & Carmen Pag├ęs, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, number heck04-1, June.
    2. 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.
    3. Holzmann, Robert & Pouget, Yann & Vodopivec, Milan & Weber, Michael, 2011. "Severance pay programs around the world : history, rationale, status, and reforms," Social Protection and Labor Policy and Technical Notes 62726, The World Bank.
    4. John T. Addison & Paulino Teixeira, 2003. "The Economics of Employment Protection," Journal of Labor Research, Transaction Publishers, vol. 24(1), pages 85-129, January.
    5. Reinhard Koman & Ulrich Schuh & Andrea Weber, 2005. "The Austrian Severance Pay Reform: Toward a Funded Pension Pillar," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 32(3), pages 255-274, September.
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    Cited by:

    1. Parsons, Donald O., 2011. "Mandated Severance Pay and Firing Cost Distortions: A Critical Review of the Evidence," IZA Discussion Papers 5776, Institute for the Study of Labor (IZA).
    2. Ferrer, Ana M. & Riddell, W. Craig, 2009. "Unemployment insurance savings accounts in Latin America : overview and assessment," Social Protection and Labor Policy and Technical Notes 49173, The World Bank.
    3. Holzmann, Robert & Pouget, Yann & Vodopivec, Milan & Weber, Michael, 2011. "Severance pay programs around the world : history, rationale, status, and reforms," Social Protection and Labor Policy and Technical Notes 62726, The World Bank.
    4. Parsons, Donald O., 2011. "Double-Sided Moral Hazard in Job Displacement Insurance Contracts," IZA Discussion Papers 6003, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    severance pay; worker turnover; job displacement; firing costs;

    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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