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Mandated versus Negotiated Severance Pay

Listed author(s):
  • Auray, Stéphane

    ()

    (CREST)

  • Danthine, Samuel

    ()

    (University of Québec at Montréal)

  • Poschke, Markus

    ()

    (McGill University)

While most of the literature on employment protection has focused on government-mandated severance pay, it has recently been documented that a substantial share of severance payments derives from private contracts or collective agreements. This paper studies the determination of these payments. We analyze the problem of joint bargaining over wages and severance payments and examine the impact of unions on these choices. To do so, we use a search and matching model with risk averse workers, in which we assume that workers may be unionized and that bargaining is over wages and severance pay. Bargaining results in levels of severance pay providing full insurance, which depend on the generosity of unemployment benefits and on the job finding rate. Unions opt for higher levels of severance pay given that their higher wage demands imply reduced job creation. Calibrated to 8 European economies, the model predicts bargained levels of severance pay which are close to those found in reality.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 8422.

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Length: 37 pages
Date of creation: Aug 2014
Handle: RePEc:iza:izadps:dp8422
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  1. Andrea Bassanini & Luca Nunziata & Danielle Venn, 2009. "Job protection legislation and productivity growth in OECD countries," Economic Policy, CEPR;CES;MSH, vol. 24, pages 349-402, 04.
  2. Conti, Maurizio & Sulis, Giovanni, 2016. "Human capital, employment protection and growth in Europe," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 213-230.
  3. William Kerr & Adriana Kugler & David Autor, 2007. "Do Employment Protections Reduce Productivity? Evidence from U.S. States," Working Papers 07-04, Center for Economic Studies, U.S. Census Bureau.
  4. Bassanini, Andrea & Garnero, Andrea, 2013. "Dismissal protection and worker flows in OECD countries: Evidence from cross-country/cross-industry data," Labour Economics, Elsevier, vol. 21(C), pages 25-41.
  5. Booth,Alison L., 1994. "The Economics of the Trade Union," Cambridge Books, Cambridge University Press, number 9780521468398, August.
  6. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R, 2014. "Severance Pay," CEPR Discussion Papers 10182, C.E.P.R. Discussion Papers.
  7. Delacroix, Alain, 2006. "A multisectorial matching model of unions," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 573-596, April.
  8. Fella Giulio & Tyson Christopher J., 2013. "Privately optimal severance pay," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-39, October.
  9. 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.
  10. Açıkgöz, Ömer Tuğrul & Kaymak, Barış, 2014. "The rising skill premium and deunionization," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 37-50.
  11. Danielle Venn, 2009. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators," OECD Social, Employment and Migration Working Papers 89, OECD Publishing.
  12. David H. Autor & William R. Kerr & Adriana D. Kugler, 2007. "Does Employment Protection Reduce Productivity? Evidence From US States," Economic Journal, Royal Economic Society, vol. 117(521), pages 189-217, 06.
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