Redundancy payments, incomplete labor contracts, unemployment and welfare

Pierre Cahuc and Andre Zylberberg

CEPREMAP Working Papers (Couverture Orange) from CEPREMAP

Abstract: It is frequently argued that pure government-mandated severance transfers by the employer to the worker have neither employment nor welfare effect because they can be offset by private transfers from the worker to the employer. In this paper, using a dynamic search and matching model à la Mortensen and Pissarides (1994), we show that it may be not any more the case if labor contracts are incomplete and canbe renegotiated by mutual agreement only. Indeed, we show that increases in high severance payments are likely to decrease unemployment but systematically decrease welfare and raise inequality. Moreover, it can be understood that insiders try to get high severance payments through political channel, although they do not fight for such a type of advantage at the firm level.

JEL-codes: H29 J23 J38 J41 J64 (search for similar items in EconPapers)
Date: 2000
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Working Paper: Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare (1999)
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Persistent link: http://EconPapers.repec.org/RePEc:cpm:cepmap:0006

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