Severance Packages

Fabien Postel-Vinay and Hélène Turon

No 6023, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Job-to-job turnover provides a way for employers to escape statutory firing costs, as unprofitable workers may willfully quit their job on receiving an outside offer, thus sparing their incumbent employer the firing costs. Furthermore, employers can induce their unprofitable workers to accept outside job offers that they would otherwise reject by offering voluntary severance packages, which are less costly than the full statutory firing cost. We formalize those mechanisms within an extension of the Diamond-Mortensen-Pissarides (DMP) matching model that allows for employed job search and negotiation over severance packages. We find that, while essentially preserving most standard qualitative predictions of the DMP model without employed job search, our model explains why higher firing costs intensify job-to-job turnover at the expense of transitions out of unemployment. We further find that allowing for on-the-job search markedly changes the quantitative predictions of the DMP model regarding the impact of firing costs on unemployment and employment flows: ignoring on-the-job search leads one to strongly underestimate the negative impact of firing costs on unemployment.

Keywords: mutual consent; on-the-job search; firing costs; minimum wage (search for similar items in EconPapers)
JEL-codes: E24 J33 J64 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-10
New Economics Papers: this item is included in nep-dge, nep-lab and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published - published as 'The Impact of Firing Restrictions on Labour Market Equilibrium in the Presence of On-the-job Search' in: Economic Journal, 2014, 124 (575), 31-61.

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