Severance Pay

36 Pages Posted: 6 Oct 2014

See all articles by Tito Boeri

Tito Boeri

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Pietro Garibaldi

University of Turin - Faculty of Economics

Espen R. Moen

BI Norwegian Business School; Centre for Economic Policy Research (CEPR)

Date Written: October 2014

Abstract

All OECD countries have either legally mandated severance pay or compensations imposed by industry-level bargaining in case of employer initiated job separations. According to the extensive literature on Employment Protection Legislation (EPL), such transfers are either ineffective or less efficient than unemployment benefits in providing insurance against labor market risk. In this paper we show that mandatory severance is optimal in presence of wage deferrals motivated by deterrence of opportunistic behavior of workers. Our results hold under risk neutrality and in general equilibrium. We also establish a link between optimal severance and efficiency of the legal system and we characterize the effects of shifting the burden of proof from the employer to the worker. Our model accounts for two neglected features of EPL. The first is the discretion of judges in interpreting the law, which relates not only to the decision as to whether the dismissal is deemed fair or unfair, but also to the nature, economic vs. disciplinary, of the layoff. The second feature is that compensation for dismissal is generally increasing with tenure. The model also rationalizes why severance is generally higher in countries with less efficient judicial systems and why small firms are typically exempted from the strictest EPL provisions.

Keywords: graded security, legal systems, severance, unfair dismissal

JEL Classification: J33, J63, J65

Suggested Citation

Boeri, Tito and Garibaldi, Pietro and Moen, Espen R., Severance Pay (October 2014). CEPR Discussion Paper No. DP10182, Available at SSRN: https://ssrn.com/abstract=2506018

Tito Boeri (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics ( email )

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

Pietro Garibaldi

University of Turin - Faculty of Economics ( email )

Facoltà di Economia
Corso Unione Sovietica 218 bis
Torino, 10134
Italy

Espen R. Moen

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
434
PlumX Metrics