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Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare


  • Cahuc, Pierre

    () (Ecole Polytechnique, Paris)

  • Zylberberg, Andre

    () (Université Paris 1 Panthéon-Sorbonne)


It is frequently argued that pure government-mandated severance transfers by the employer to the worker have neither employment nor welfare effect because they can be offset by private transfers from the worker to the employer. In this paper, using a dynamic search and matching model à la Mortensen and Pissarides (1994), we show that it may be not any more the case if labor contracts are incomplete and can be renegotiated by mutual agreement only. Indeed, we show that increases in high severance payments are likely to decrease unemployment but systematically decrease welfare and raise inequality. Moreover, it can be understood that insiders try to get high severance payments through political channels, although they do not fight for such a type of advantage at the firm level.

Suggested Citation

  • Cahuc, Pierre & Zylberberg, Andre, 1999. "Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare," IZA Discussion Papers 96, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp96

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    References listed on IDEAS

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    Cited by:

    1. Fertig, Michael & Schmidt, Christoph M., 2000. "Discretionary Measures of Active Labor Market Policy: The German Employment Promotion Reform in Perspective," IZA Discussion Papers 182, Institute for the Study of Labor (IZA).
    2. Jens Suedekum & Peter Ruehmann, 2003. "Severance Payments and Firm-specific Human Capital," LABOUR, CEIS, vol. 17(1), pages 47-62, March.
    3. Bonin, Holger & Zimmermann, Klaus F., 2000. "The Post-Unification German Labor Market," IZA Discussion Papers 185, Institute for the Study of Labor (IZA).
    4. Garibaldi, Pietro & Violante, Giovanni L, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
    5. Postel-Vinay, Fabien & Turon, Hélène, 2011. "Severance Packages," IZA Discussion Papers 6023, Institute for the Study of Labor (IZA).
    6. Huang, Chun-chieh & Chang, Juin-jen & Lai, Ching-chong, 2009. "Employment effect of dismissal pay in the presence of judicial mistakes," International Review of Law and Economics, Elsevier, vol. 29(1), pages 38-45, March.

    More about this item


    Unemployment; job protection; severance payments; renegotiation;

    JEL classification:

    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search


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