Mandated Versus Negotiated Severance Pay

37 Pages Posted: 6 Sep 2014

See all articles by Stéphane Auray

Stéphane Auray

CREST-Ensai

Samuel Danthine

École Nationale de la Statistique et de l'Analyse de l'Information (ENSAI)

Markus Poschke

McGill University - Department of Economics; IZA Institute of Labor Economics

Abstract

While most of the literature on employment protection has focused on government-mandated severance pay, it has recently been documented that a substantial share of severance payments derives from private contracts or collective agreements. This paper studies the determination of these payments. We analyze the problem of joint bargaining over wages and severance payments and examine the impact of unions on these choices.To do so, we use a search and matching model with risk averse workers, in which we assume that workers may be unionized and that bargaining is over wages and severance pay. Bargaining results in levels of severance pay providing full insurance, which depend on the generosity of unemployment benefits and on the job finding rate. Unions opt for higher levels of severance pay given that their higher wage demands imply reduced job creation. Calibrated to 8 European economies, the model predicts bargained levels of severance pay which are close to those found in reality.

Keywords: severance pay, unions, bargaining, Diamond-Mortensen-Pissarides models

JEL Classification: E24, J32, J33, J64, J65

Suggested Citation

Auray, Stéphane and Danthine, Samuel and Poschke, Markus, Mandated Versus Negotiated Severance Pay. IZA Discussion Paper No. 8422. Available at SSRN: https://ssrn.com/abstract=2492449

Stéphane Auray (Contact Author)

CREST-Ensai ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Samuel Danthine

École Nationale de la Statistique et de l'Analyse de l'Information (ENSAI) ( email )

Rennes Métropole - Campus de Ker Lann
Rue Blaise Pascal
BP 37203- 35172 BRUZ Cedex
France

Markus Poschke

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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