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Severance Packages

Author

Listed:
  • Postel-Vinay, Fabien

    () (University College London)

  • Turon, Hélène

    () (University of Bristol)

Abstract

Job-to-job turnover provides a way for employers to escape statutory firing costs, as unprofitable workers may willfully quit their job on receiving an outside offer, thus sparing their incumbent employer the firing costs. Furthermore, employers can induce their unprofitable workers to accept outside job offers that they would otherwise reject by offering voluntary severance packages, which are less costly than the full statutory firing cost. We formalize those mechanisms within an extension of the Diamond-Mortensen-Pissarides (DMP) matching model that allows for employed job search and negotiation over severance packages. We find that, while essentially preserving most standard qualitative predictions of the DMP model without employed job search, our model explains why higher firing costs intensify job-to-job turnover at the expense of transitions out of unemployment. We further find that allowing for on-the-job search markedly changes the quantitative predictions of the DMP model regarding the impact of firing costs on unemployment and employment flows: ignoring on-the-job search leads one to strongly underestimate the negative impact of firing costs on unemployment.

Suggested Citation

  • Postel-Vinay, Fabien & Turon, Hélène, 2011. "Severance Packages," IZA Discussion Papers 6023, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp6023
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    References listed on IDEAS

    as
    1. Fabien Postel-Vinay & Hélène Turon, 2010. "On-The-Job Search, Productivity Shocks, And The Individual Earnings Process," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 599-629, August.
    2. Cahuc, Pierre & Zylberberg, Andre, 1999. "Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare," IZA Discussion Papers 96, Institute for the Study of Labor (IZA).
    3. Fella, Giulio, 2007. "When do firing taxes matter?," Economics Letters, Elsevier, vol. 97(1), pages 24-31, October.
    4. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
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    Cited by:

    1. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.

    More about this item

    Keywords

    mutual consent; on-the-job search; firing costs; minimum wage;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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