Labor-market Frictions, Incomplete Insurance and Severance Payments

Etienne Lalé ()

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: We analyze the effects of mandated severance payments in an economy with search and matching in the labor market, risk-averse individuals and imperfect insurance against shocks. Our model emphasizes a tension between efficient worker-firm bargains and consumption smoothing: a well-designed contract dictates a downward shift in entry wages to offset expected severance payments, and thus goes against having a smooth consumption path. As a result, we find that severance payments produce mostly negative welfare effects. There are large allocation and welfare effects in the absence of savings which limits the response of wages to severance payments. With savings, the impact on equilibrium allocations is considerably dampened, but the welfare losses remain substantial.

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)
Pages: 32 pages
Date: 2014-11, Revised 2016-08-16
New Economics Papers: this item is included in nep-dge and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.bristol.ac.uk/efm/media/workingpapers/w ... pdffiles/dp16648.pdf (application/pdf)

Related works:
Journal Article: Labor-market Frictions, Incomplete Insurance and Severance Payments (2019)
Working Paper: Labor-market Frictions, Incomplete Insurance and Severance Payments (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:14/648

Access Statistics for this paper

More papers in Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK
Bibliographic data for series maintained by Vicky Jackson ().