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The Simple Analytics of Job Displacement Insurance

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  • Parsons, Donald O.

    (George Washington University)

Abstract

Job displacement in the U.S. is a serious threat to the earnings of long-tenured workers, through both (i) unemployment spells and (ii) reduced reemployment wages. Although full insurance requires both unemployment benefits and wage insurance, supply difficulties limit actual-loss insurance, and separation packages typically include partial unemployment insurance and scheduled (fixed sum) severance pay. The design of this two dimensional package requires a systems approach as well as a generalized replacement ratio measure of adequacy). Job search moral hazard and layoff moral hazard (firing costs), individually and in combination, introduce potentially serious contracting concerns. Economic theory provides a practical guide to the integration of these insurance instruments in this complex planning environment. One important implication: given the structure of earnings losses at displacement in the U.S., severance pay should increase with length of service in the firm ("tenure"), which is common, and unemployment insurance benefit levels should fall, which is not.

Suggested Citation

  • Parsons, Donald O., 2016. "The Simple Analytics of Job Displacement Insurance," IZA Discussion Papers 9823, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp9823
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    References listed on IDEAS

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    Cited by:

    1. Robert Dur & Heiner Schmittdiel, 2019. "Paid to Quit," De Economist, Springer, vol. 167(4), pages 387-406, December.
    2. François Gerard & Joana Naritomi, 2021. "Job Displacement Insurance and (the Lack of) Consumption-Smoothing," American Economic Review, American Economic Association, vol. 111(3), pages 899-942, March.

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    More about this item

    Keywords

    job displacement; unemployment insurance; wage insurance; severance pay; moral hazard; insurance adequacy; replacement rate;
    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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