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An economic analysis of dismissal legislation: Determinants of severance pay in West Germany

  • Goerke, Laszlo
  • Pannenberg, Markus

Severance pay is a vital part of employment protection legislation (EPL). We investigate the incidence and level of severance pay for dismissed employees. Our theoretical model predicts that not only the law and its interpretation by labour courts but also the costs of a suit have an impact. Using West German panel data for 1991-2006, we find that the employees' costs resulting from a suit and the legal determinants of such transfers affect the incidence of severance payments. In contrast, their level only varies with legal regulations. Our results imply that the strictness of EPL in Germany varies with extra-legal factors like employees' financial constraints.

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Paper provided by University of Goettingen, Department of Economics in its series Center for European, Governance and Economic Development Research Discussion Papers with number 87.

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Date of creation: 2009
Date of revision:
Handle: RePEc:zbw:cegedp:87
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  1. Willard G. Manning & Anirban Basu & John Mullahy, 2003. "Generalized Modeling Approaches to Risk Adjustment of Skewed Outcomes Data," Working Papers 0313, Harris School of Public Policy Studies, University of Chicago.
  2. Goerke, Laszlo & Pannenberg, Markus, 2009. "The effects of income taxation on severance pay," Labour Economics, Elsevier, vol. 16(1), pages 107-118, January.
  3. Elke J. Jahn, 2009. "Do firms obey the law when they fire workers? Social criteria and severance payments in Germany," International Journal of Manpower, Emerald Group Publishing, vol. 30(7), pages 672-691, November.
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  6. Christian Grund, 2006. "Overcompensation by severance payments," Applied Economics, Taylor & Francis Journals, vol. 38(8), pages 925-930.
  7. Huang, Chun-chieh & Chang, Juin-jen & Lai, Ching-chong, 2009. "Employment effect of dismissal pay in the presence of judicial mistakes," International Review of Law and Economics, Elsevier, vol. 29(1), pages 38-45, March.
  8. Andrew M. Jones, 2012. "health econometrics," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
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  10. Stähler, Nikolai, 2008. "Firing costs, severance payments, judicial mistakes and unemployment," Labour Economics, Elsevier, vol. 15(6), pages 1162-1178, December.
  11. Jolls, Christine, 2007. "Employment Law," Handbook of Law and Economics, Elsevier.
  12. Christine Jolls, 2004. "The Role and Functioning of Public-Interest Legal Organizations in the Enforcement of the Employment Laws," NBER Chapters, in: Emerging Labor Market Institutions for the Twenty-First Century, pages 141-176 National Bureau of Economic Research, Inc.
  13. E. Galdon-Sanchez, Jose & Guell, Maia, 2003. "Dismissal conflicts and unemployment," European Economic Review, Elsevier, vol. 47(2), pages 323-335, April.
  14. Christine Jolls, 2007. "Employment Law and the Labor Market," NBER Working Papers 13230, National Bureau of Economic Research, Inc.
  15. Besancenot, Damien & Vranceanu, Radu, 2009. "Multiple equilibria in a firing game with impartial justice," Labour Economics, Elsevier, vol. 16(3), pages 262-271, June.
  16. Thomas K. Bauer & Stefan Bender & Holger Bonin, 2007. "Dismissal Protection and Worker Flows in Small Establishments," Economica, London School of Economics and Political Science, vol. 74(296), pages 804-821, November.
  17. Ioana Marinescu, 2011. "Are Judges Sensitive to Economic Conditions? Evidence from UK Employment Tribunals," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 64(4), pages 673-698, July.
  18. Christine Jolls, 2004. "The Role and Functioning of Public-Interest Legal Organizations in the Enforcement of the Employment Laws," NBER Working Papers 10708, National Bureau of Economic Research, Inc.
  19. World Bank & International Finance Corporation, 2006. "Doing Business in 2006 : Creating Jobs," World Bank Publications, The World Bank, number 7421.
  20. Miguel �. Malo, 2000. "A Simple Model of Severance Pay Determination: The Case of Individual Dismissals in Spain," LABOUR, CEIS, vol. 14(2), pages 269-290, 06.
  21. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP) – Scope, Evolution and Enhancements," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 127(1), pages 139-169.
  22. Christian Grund, 2006. "Severance payments for dismissed employees in Germany," European Journal of Law and Economics, Springer, vol. 22(1), pages 49-71, July.
  23. Malo, M.A aand Joaquin Pérez., 2002. "Individual dismissals in Europe and the United States: A model on the influence of the legal framework on firing costs," Doctorado en Economía- documentos de trabajo 9/02, Programa de doctorado en Economía. Universidad de Alcalá..
  24. Eger, Thomas, 2003. "Opportunistic termination of employment contracts and legal protection against dismissal in Germany and the USA," International Review of Law and Economics, Elsevier, vol. 23(4), pages 381-403, December.
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