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Job Displacement Risk and Severance Pay

Author

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  • Marco Cozzi

    (University of Victoria)

  • Giulio Fella

    (Queen Mary University of London)

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 numerically 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 & Giulio Fella, 2016. "Job Displacement Risk and Severance Pay," Working Papers 795, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:795
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    Citations

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    Cited by:

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    3. Sahin Avcioglu & Bilgehan Karabay, 2020. "Labor market regulation under self‐enforcing contracts," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 1965-2018, December.
    4. Juan J. Dolado & Etienne Lalé & Nawid Siassi, 2021. "From dual to unified employment protection: Transition and steady state," Quantitative Economics, Econometric Society, vol. 12(2), pages 547-585, May.
    5. 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.
    6. Jonathan Créchet, 2023. "Risk Sharing in a Dual Labor Market," Working Papers 2307E, University of Ottawa, Department of Economics.
    7. 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.
    8. Donald O. Parsons, 2018. "Compensating displaced workers," IZA World of Labor, Institute of Labor Economics (IZA), pages 444-444, September.
    9. Cristina Lafuente, 2017. "Search capital and Unemployment Duration (Preliminary)," Edinburgh School of Economics Discussion Paper Series 283, Edinburgh School of Economics, University of Edinburgh.
    10. Cristina Lafuente, 2018. "Search capital and Unemployment Duration," 2018 Meeting Papers 427, Society for Economic Dynamics.
    11. Parsons, Donald O., 2017. "Voluntary Employer-Provided Severance Pay," IZA Discussion Papers 11067, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Severance payments; Incomplete markets; Welfare;
    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
    • 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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