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Matching, Wage Rigidities and Efficient Severance Pay

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  • Giulio Fella

    (Queen Mary, University of London)

Abstract

This paper studies the effect of mandated severance pay in a matching model featuring wage rigidity for ongoing, but not new, matches. Mandated severance pay matters only if binding real wage rigidities imply inefficient separation under employment at will. In such a case, large enough severance payments reduce job destruction, and increase job creation and social efficiency, under very mild conditions. Furthermore, mandated severance pay never results in inefficient labor hoarding. Whenever separation is jointly optimal, the parties agree to end the match with a spot severance payment below the statutory one. The marginal effect of mandated severance pay is zero when its size exceeds that which induces the same allocation that would prevail in the absence of wage rigidity. The results hold under alternative micro-foundations for wage rigidity.

Suggested Citation

  • Giulio Fella, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," Working Papers 698, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:698
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    Cited by:

    1. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.
    2. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R., 2017. "Inside severance pay," Journal of Public Economics, Elsevier, vol. 145(C), pages 211-225.
    3. Cozzi, Marco & Fella, Giulio, 2016. "Job displacement risk and severance pay," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 166-181.
    4. Pedro S. Martins, 2016. "The third worker: Assessing the trade-off between employees and contractors," Working Papers 75, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    5. Martins, Pedro S., 2021. "Do entry wages increase when severance pay drops? Not in recessions," Economics Letters, Elsevier, vol. 201(C).
    6. 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.
    7. repec:hal:spmain:info:hdl:2441/7hh2up94ii8d2rg9pa9vg9eh3t is not listed on IDEAS
    8. Pedro S. Martins, 2016. "Do wages increase when severance pay drops? Not in recessions," Working Papers 77, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.

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    More about this item

    Keywords

    Severance pay; Renegotiation; Wage rigidity;
    All these keywords.

    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
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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