The Employment Effects of Severance Payments with Wage Rigidities
Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
New York University, Leonard N. Stern School of Business, Department of Economics; Centre for Economic Policy Research (CEPR)
Economic Journal, Vol. 115, No. 506, pp. 799-832, October 2005
Firing costs have two separate dimensions: a transfer from the firm to the laid-off worker and a tax paid outside the firm-worker pair. To avoid the 'bonding critique' most of the existing literature implicitly assumes that, in the presence of wage rigidity, transfers have the same real effects as taxes. This paper shows that this presumption is in general misplaced, especially so when the degree of wage rigidity is endogenous. The predictions of our theory find empirical support in a panel data-set of OECD countries.
Number of Pages in PDF File: 34Accepted Paper Series
Date posted: December 6, 2005
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