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Job Displacement Risk And Severance Pay

Author

Listed:
  • Giulio Fella

    (Queen Mary)

  • Marco Cozzi

    (Queen)

Abstract

This paper is a quantitative, equilibrium study of the insurance role of severance paywhen workers face displacement risk and markets are incomplete. A key feature ofour model is that, in line with an established empirical literature, job displacemententails a persistent fall in earnings upon reemployment due to the loss of job-specifichuman capital. The model is solved numerically and calibrated to the US economy. Incontrast to previous studies that have analyzed severance payments in the absence ofpersistent earning losses, we find that the welfare gains from the insurance against jobdisplacement afforded by severance pay are sizable. These gains are higher if, as in mostOECD countries, severance pay increases with tenure. The result is a consequence ofthe higher persistence of earnings losses for workers with a larger stock of job-specifichuman capital at the time of displacement.

Suggested Citation

  • Giulio Fella & Marco Cozzi, 2015. "Job Displacement Risk And Severance Pay," Working Paper 1338, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1338
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    References listed on IDEAS

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    Cited by:

    1. Francesco Zanetti & Konstantinos Theodoridis, 2018. "State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications," Economics Series Working Papers 856, University of Oxford, Department of Economics.
    2. Etienne Lale, 2019. "Labor-market Frictions, Incomplete Insurance and Severance Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 411-435, January.
    3. Barceló, Cristina & Villanueva, Ernesto, 2016. "The response of household wealth to the risk of job loss: Evidence from differences in severance payments," Labour Economics, Elsevier, vol. 39(C), pages 35-54.
    4. 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.
    5. Parsons, Donald O., 2017. "Voluntary Employer-Provided Severance Pay," IZA Discussion Papers 11067, Institute of Labor Economics (IZA).
    6. Cristina Lafuente, 2018. "Search capital and Unemployment Duration," 2018 Meeting Papers 427, Society for Economic Dynamics.
    7. Cristina Lafuente, 2017. "Search capital and Unemployment Duration (Preliminary)," ESE Discussion Papers 283, Edinburgh School of Economics, University of Edinburgh.
    8. Cristina Barceló & Ernesto Villanueva, 2018. "The risk of job loss, household formation and housing demand: evidence from differences in severance payments," Working Papers 1849, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    Severance Payments; Incomplete Markets; Welfare;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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