Understanding Severance Pay

Donald Parsons

No 7641, IZA Discussion Papers from IZA Network @ LISER

Abstract: Severance pay, a fixed-sum payment to workers at job separation, has been the focus of intense policy concern for the last several decades, but much of this concern is unearned. The design of the ideal separation package is outlined and severance pay emerges as a natural component of job displacement insurance packages, serving both as scheduled reemployment wage insurance and, if search moral hazard is a problem, as scheduled UI. Like any firm-financed separation expenditure, severance pay can induce excessive job retention, but such distortions do not appear to be of practical significance at benefit levels typically mandated in the industrialized world. Moreover there is no evidence that firms attempt to avoid these firing cost distortions by substituting severance savings plans, which have zero firing costs. Indeed severance insurance plans similar to those mandated are often offered voluntarily in the U.S. The appropriate role of government in the market for severance pay is briefly considered.

Keywords: unemployment insurance; firing costs; job displacement; severance pay; moral hazard (search for similar items in EconPapers)
JEL-codes: J08 J33 J41 J65 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2013-09
New Economics Papers: this item is included in nep-hrm, nep-ias, nep-lab and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published - Cuadernos de Economía (Spanish Journal of Economics and Finance), 2013, 36 (106), 155-165.

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