IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Matching, Wage Rigidities and Efficient Severance Pay

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 698.

in new window

Date of creation: Nov 2012
Date of revision:
Handle: RePEc:qmw:qmwecw:wp698
Contact details of provider: Postal: London E1 4NS
Phone: +44 (0) 20 7882 5096
Fax: +44 (0) 20 8983 3580
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
  2. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
  3. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  4. Wolinsky, Asher, 1987. "Matching, search, and bargaining," Journal of Economic Theory, Elsevier, vol. 42(2), pages 311-333, August.
  5. Luis Toharia & Antonio Ojeda, 1999. "The Management of Redundancies in Europe: The Case of Spain," LABOUR, CEIS, vol. 13(1), pages 237-267, 03.
  6. MacLeod, W Bentley & Malcomson, James M, 1993. "Investments, Holdup, and the Form of Market Contracts," American Economic Review, American Economic Association, vol. 83(4), pages 811-37, September.
  7. Fella, Giulio, 2000. "Efficiency wage and efficient redundancy pay," European Economic Review, Elsevier, vol. 44(8), pages 1473-1490, August.
  8. Rocheteau, Guillaume, 2002. "Working time regulation in a search economy with worker moral hazard," Journal of Public Economics, Elsevier, vol. 84(3), pages 387-425, June.
  9. Francesco Devicienti & Agata Maida & Paolo Sestito, 2007. "Downward Wage Rigidity in Italy: Micro-Based Measures and Implications," Economic Journal, Royal Economic Society, vol. 117(524), pages F530-F552, November.
  10. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  11. MacLeod, W.B. & Malcomson, J.M., 1994. "Contract bargaining with symmetric information," Discussion Paper Series In Economics And Econometrics 9409, Economics Division, School of Social Sciences, University of Southampton.
  12. Christofides, Louis N. & Nearchou, Paris, 2007. "Real and Nominal Wage Rigidities in Collective Bargaining Agreements," IZA Discussion Papers 2799, Institute for the Study of Labor (IZA).
  13. Masters, Adrian M, 1999. "Wage Posting in Two-Sided Search and the Minimum Wage," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 809-26, November.
  14. RichardD. Barwell & MarkE. Schweitzer, 2007. "The Incidence of Nominal and Real Wage Rigidities in Great Britain: 1978-98," Economic Journal, Royal Economic Society, vol. 117(524), pages F553-F569, November.
  15. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  16. Bauer, Thomas K. & Bonin, Holger & Sunde, Uwe, 2004. "Real and Nominal Wage Rigidities and the Rate of Inflation: Evidence from West German Micro Data," RWI Discussion Papers 12, Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI).
  17. Ernst Fehr & Lorenz Götte, 2000. "Robustness and Real Consequences of Nominal Wage Rigidity," CESifo Working Paper Series 335, CESifo Group Munich.
  18. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  19. Aaron S. Edlin and Chris Shannon., 1995. "Strict Monotonicity in Comparative Statics," Economics Working Papers 95-238, University of California at Berkeley.
  20. Anabela Carneiro & Paulo Guimar�es & Pedro Portugal, 2012. "Real Wages and the Business Cycle: Accounting for Worker, Firm, and Job Title Heterogeneity," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 133-52, April.
  21. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  22. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  23. Coles, Melvyn G & Hildreth, Andrew K G, 2000. "Wage Bargaining, Inventories, and Union Legislation," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 273-93, April.
  24. Pedro S. Martins & Gary Solon & Jonathan P. Thomas, 2012. "Measuring What Employers Do about Entry Wages over the Business Cycle: A New Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 36-55, October.
  25. E. Galdon-Sanchez, Jose & Guell, Maia, 2003. "Dismissal conflicts and unemployment," European Economic Review, Elsevier, vol. 47(2), pages 323-335, April.
  26. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
  27. Gilles Saint Paul, 1999. "The political economy of employment protection," Economics Working Papers 355, Department of Economics and Business, Universitat Pompeu Fabra.
  28. Holden, Steinar & Wulfsberg, Fredrik, 2009. "How strong is the macroeconomic case for downward real wage rigidity?," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 605-615, May.
  29. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  30. Fella, Giulio, 2007. "When do firing taxes matter?," Economics Letters, Elsevier, vol. 97(1), pages 24-31, October.
  31. Haller, Hans & Holden, Steinar, 1990. "A letter to the editor on wage bargaining," Journal of Economic Theory, Elsevier, vol. 52(1), pages 232-236, October.
  32. Giulio Fella, 1999. "When Do Firing Costs Matter?," Working Papers 400, Queen Mary University of London, School of Economics and Finance.
  33. Fella, Giulio, 2005. "Termination restrictions and investment in general training," European Economic Review, Elsevier, vol. 49(6), pages 1479-1499, August.
  34. Merlo, Antonio & Wilson, Charles A, 1995. "A Stochastic Model of Sequential Bargaining with Complete Information," Econometrica, Econometric Society, vol. 63(2), pages 371-99, March.
  35. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  36. Postel-Vinay, Fabien & Turon, Hélène, 2011. "Severance Packages," IZA Discussion Papers 6023, Institute for the Study of Labor (IZA).
  37. Gilles SAINT-PAUL, 1995. "Efficiency Wage, Commitment and Hysteresis," Annales d'Economie et de Statistique, ENSAE, issue 37-38, pages 39-53.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:qmw:qmwecw:wp698. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nick Vriend)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.