Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare

Pierre Cahuc and Andre Zylberberg ()

No 96, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: It is frequently argued that pure government-mandated severance transfers by the employer to the worker have neither employment nor welfare effect because they can be offset by private transfers from the worker to the employer. In this paper, using a dynamic search and matching model à la Mortensen and Pissarides (1994), we show that it may be not any more the case if labor contracts are incomplete and can be renegotiated by mutual agreement only. Indeed, we show that increases in high severance payments are likely to decrease unemployment but systematically decrease welfare and raise inequality. Moreover, it can be understood that insiders try to get high severance payments through political channels, although they do not fight for such a type of advantage at the firm level.

Keywords: Unemployment; job protection; severance payments; renegotiation (search for similar items in EconPapers)
JEL-codes: H29 J23 J38 J41 J64 (search for similar items in EconPapers)
Pages: 32 pages
Date: 1999-12
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Redundancy payments, incomplete labor contracts, unemployment and welfare (2000)
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