The Employment Effects of Severance Payments with Wage Rigidities

34 Pages Posted: 6 Dec 2005

See all articles by Pietro Garibaldi

Pietro Garibaldi

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

Giovanni L. Violante

New York University, Department of Economics; Centre for Economic Policy Research (CEPR)

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Abstract

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.

Suggested Citation

Garibaldi, Pietro and Violante, Giovanni L., The Employment Effects of Severance Payments with Wage Rigidities. Economic Journal, Vol. 115, No. 506, pp. 799-832, October 2005. Available at SSRN: https://ssrn.com/abstract=856689 or http://dx.doi.org/10.1111/j.1468-0297.2005.01020.x

Pietro Garibaldi (Contact Author)

Bocconi University - Department of Economics ( email )

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HOME PAGE: http://www.frdb.org/~pietrogaribaldi/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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Bonn, D-53072
Germany

Giovanni L. Violante

New York University, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-992-9771 (Phone)
212-995-4186 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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