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Job Displacement Risk and Severance Pay

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Abstract

This paper is a quantitative, equilibrium study of the insurance role of severance pay when workers face displacement risk and markets are incomplete. A key feature of our model is that,in line with an established empirical literature, job displacement entails a persistent fall in earnings upon re-employment due to the loss of tenure. The model is solved umerically and calibrated to the US economy.In contrast to previous studies that have analyzed severance payments in the absence of persistent earning losses, we find that the welfare gains from the insurance against job displacement afforded by severance pay are sizable.

Suggested Citation

  • Marco Cozzi, 2016. "Job Displacement Risk and Severance Pay," Department Discussion Papers 1601, Department of Economics, University of Victoria.
    • Handle: RePEc:vic:vicddp:1601
    Note: ISSN 1914-2838
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    6. Donald O. Parsons, 2023. "How should job displacement wage losses be insured?," IZA World of Labor, Institute of Labor Economics (IZA), pages 446-446, July.
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    8. Donald O. Parsons, 2018. "Compensating displaced workers," IZA World of Labor, Institute of Labor Economics (IZA), pages 444-444, September.
    9. Parsons, Donald O., 2017. "Voluntary Employer-Provided Severance Pay," IZA Discussion Papers 11067, Institute of Labor Economics (IZA).
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    Keywords

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    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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