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Labor-market Frictions, Incomplete Insurance and Severance Payments

Etienne Lalé ()

Review of Economic Dynamics, 2019, vol. 31, 411-435

Abstract: We analyze the effects of government-mandated severance payments in a rich life-cycle model with search-matching frictions in the labor market, risk-averse agents and imperfect insurance against idiosyncratic shocks. Our model emphasizes a tension between worker-firm wage bargains and consumption smoothing: entry wages respond to expected future severance payments by tilting downwards, which runs counter to having a smooth consumption path. Quantitatively, we find that these wage-shifting effects are sizable enough for severance payments to produce large welfare losses. Our assessment contrasts sharply with previous studies that restricted the extent of worker-firm bargaining to analyze the welfare implications of severance payments. (Copyright: Elsevier)

Keywords: Severance payments; Labor-market frictions; precautionary savings; welfare (search for similar items in EconPapers)
JEL-codes: E21 I38 J63 J65 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.red.2018.10.001

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