Labor-market Frictions, Incomplete Insurance and Severance Payments

37 Pages Posted: 7 Dec 2014 Last revised: 10 Feb 2019

See all articles by Etienne Lalé

Etienne Lalé

University of Quebec at Montreal (UQAM) - Université du Québec à Montréal; CIRANO; IZA

Date Written: October 1, 2018

Abstract

We analyze the effects of government-mandated severance payments in a rich life-cycle model with search-matching frictions in the labor market, risk-averse agents and imperfect insurance against idiosyncratic shocks. Our model emphasizes a tension between worker-firm wage bargains and consumption smoothing: entry wages respond to expected future severance payments by tilting downwards, which runs counter to having a smooth consumption path. Quantitatively, we find that these wage-shifting effects are sizable enough for severance payments to produce large welfare losses. Our assessment contrasts sharply with previous studies that restricted the extent of worker-firm bargaining to analyze the welfare implications of severance payments.

Keywords: Severance Payments, Labor-market Frictions, Precautionary Savings, Welfare

JEL Classification: E21, I38, J63, J65

Suggested Citation

Lalé, Etienne, Labor-market Frictions, Incomplete Insurance and Severance Payments (October 1, 2018). Review of Economic Dynamics, Vol. 31, January 2019, Pages 411-435.. Available at SSRN: https://ssrn.com/abstract=2534431 or http://dx.doi.org/10.2139/ssrn.2534431

Etienne Lalé (Contact Author)

University of Quebec at Montreal (UQAM) - Université du Québec à Montréal ( email )

CP 8888 Succ Centre Ville
Montréal, Québec H3C3P8
Canada

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

IZA ( email )

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

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