Employment protection and incentives: Severance pay vs. procedural inconvenience

Kyota Eguchi

Journal of the Japanese and International Economies, 2014, vol. 34, issue C, 272-290

Abstract: I consider the effects of employment protection (EP) on worker incentives in the labor market with search friction, where EP is categorized into severance pay (SP) and procedural inconvenience (PI). When firms cannot distinguish shirkers, EP seems to negatively affect worker incentives, because shirkers are unlikely to be fired. However, EP can have a positive effect on worker incentives because diligent workers are protected by EP. It is shown that the positive effect can dominate the negative one when EP is moderate. In particular, PI tends to improve the unemployment rate and welfare, while SP has a somewhat unclear effect.

Keywords: Worker incentives; Search friction; Commitment (search for similar items in EconPapers)
JEL-codes: J64 J65 K31 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:34:y:2014:i:c:p:272-290

DOI: 10.1016/j.jjie.2014.09.001

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