Severance Packages

38 Pages Posted: 23 Oct 2011

See all articles by Fabien Postel-Vinay

Fabien Postel-Vinay

Centre for Economic Policy Research (CEPR); University of Bristol; IZA Institute of Labor Economics; Centre for Structural Econometrics (CSE)

Hélène Turon

University of Bristol; IZA Institute of Labor Economics

Abstract

Job-to-job turnover provides a way for employers to escape statutory firing costs, as unprofitable workers may willfully quit their job on receiving an outside offer, thus sparing their incumbent employer the firing costs. Furthermore, employers can induce their unprofitable workers to accept outside job offers that they would otherwise reject by offering voluntary severance packages, which are less costly than the full statutory firing cost. We formalize those mechanisms within an extension of the Diamond-Mortensen-Pissarides (DMP) matching model that allows for employed job search and negotiation over severance packages. We find that, while essentially preserving most standard qualitative predictions of the DMP model without employed job search, our model explains why higher firing costs intensify job-to-job turnover at the expense of transitions out of unemployment. We further find that allowing for on-the-job search markedly changes the quantitative predictions of the DMP model regarding the impact of firing costs on unemployment and employment flows: ignoring on-the-job search leads one to strongly underestimate the negative impact of firing costs on unemployment.

Keywords: firing costs, on-the-job search, mutual consent, minimum wage

JEL Classification: J33, J64, E24

Suggested Citation

Postel-Vinay, Fabien and Postel-Vinay, Fabien and Turon, Helene, Severance Packages. IZA Discussion Paper No. 6023, Available at SSRN: https://ssrn.com/abstract=1948019 or http://dx.doi.org/10.2139/ssrn.1948019

Fabien Postel-Vinay (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, Avon BS8 ITH
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Structural Econometrics (CSE) ( email )

Department of Economics, University of Bristol
8 Woodland Road
Bristol, BS8 1TN
United Kingdom

Helene Turon

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, Avon BS8 ITH
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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