Severance Packages
38 Pages Posted: 23 Oct 2011
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consequences of Employment Protection? the Case of the Americans with Disabilities Act
By Daron Acemoglu and Joshua D. Angrist
-
Temporary Jobs: Stepping Stones or Dead Ends?
By Alison L. Booth, Marco Francesconi, ...
-
Temporary Jobs, Employment Protection and Labor Market Performance
By Pierre Cahuc and Fabien Postel-vinay
-
The Cost of Job Security Regulation: Evidence from Latin American Labor Markets
By James J. Heckman and Carmen Pages
-
Why Do Temporary Help Firms Provide Free General Skills Training?
-
Drawing Lessons from the Boom of Temporary Jobs in Spain
By Juan Jose Dolado, Carlos García Serrano, ...
-
Drawing Lessons from the Boom of Temporary Jobs in Spain
By Juan F. Jimeno, Juan Jose Dolado, ...
-
Why Do Temporary Help Firms Provide Free General Skills Training?