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Understanding Severance Pay

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  • Parsons, Donald O.

    (George Washington University)

Abstract

Severance pay, a fixed-sum payment to workers at job separation, has been the focus of intense policy concern for the last several decades, but much of this concern is unearned. The design of the ideal separation package is outlined and severance pay emerges as a natural component of job displacement insurance packages, serving both as scheduled reemployment wage insurance and, if search moral hazard is a problem, as scheduled UI. Like any firm-financed separation expenditure, severance pay can induce excessive job retention, but such distortions do not appear to be of practical significance at benefit levels typically mandated in the industrialized world. Moreover there is no evidence that firms attempt to avoid these firing cost distortions by substituting severance savings plans, which have zero firing costs. Indeed severance insurance plans similar to those mandated are often offered voluntarily in the U.S. The appropriate role of government in the market for severance pay is briefly considered.

Suggested Citation

  • Parsons, Donald O., 2013. "Understanding Severance Pay," IZA Discussion Papers 7641, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp7641
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Why severance pay?
      by Economic Logician in Economic Logic on 2013-11-14 20:46:00

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    Cited by:

    1. Cozzi, Marco & Fella, Giulio, 2016. "Job displacement risk and severance pay," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 166-181.
    2. Donald O. Parsons, 2018. "How should job displacement wage losses be insured?," IZA World of Labor, Institute of Labor Economics (IZA), pages 446-446, June.
    3. Donald O. Parsons, 2018. "Compensating displaced workers," IZA World of Labor, Institute of Labor Economics (IZA), pages 444-444, September.

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    More about this item

    Keywords

    unemployment insurance; firing costs; job displacement; severance pay; moral hazard;
    All these keywords.

    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
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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