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Inside Severance Pay

Author

Listed:
  • Tito Boeri

    (Bocconi University)

  • Pietro Garibaldi

    (Collegio Carlo Alberto)

  • Espen R Moen

    (BI Norwegian Business School [Oslo])

Abstract

All OECD countries have either legally mandated severance pay or compensations imposed by industry-level bargaining in case of employer initiated job separations. In the literature such transfers are either ineffective or less efficient than unemployment benefits in providing insurance against labor market risk. The paper shows that mandatory severance is optimal in presence of wage deferrals induced by workers' moral hazard. We also establish a link between optimal severance and efficiency of the legal system and characterize the effects of shifting the burden of proof from the employer to the worker. Quantitatively, the welfare effects of suboptimal severance payments vary in general equilibrium between 1 and 3 percent. The model accounts also for two neglected features of the legislation. The first is the discretion of judges in declaring the nature, economic vs. disciplinary, of the layoff. The second feature is that compensation for dismissal is generally increasing with tenure.

Suggested Citation

  • Tito Boeri & Pietro Garibaldi & Espen R Moen, 2016. "Inside Severance Pay," Sciences Po publications 47, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/7hh2up94ii8d2rg9pa9vg9eh3t
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. 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.
    2. repec:eee:jetheo:v:169:y:2017:i:c:p:551-602 is not listed on IDEAS
    3. Etienne Lalé, 2018. "Turbulence and the employment experience of older workers," Quantitative Economics, Econometric Society, vol. 9(2), pages 735-784, July.
    4. repec:spr:series:v:8:y:2017:i:4:d:10.1007_s13209-017-0166-9 is not listed on IDEAS

    More about this item

    JEL classification:

    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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