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Title:Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare PDF Logo
Authors:Cahuc, Pierre
Zylberberg, André
Issue Date:1999
Series/Report no.:IZA Discussion paper series 96
Abstract:It is frequently argued that pure government-mandated severance transfers by the employer to the worker have neither employment nor welfare effect because they can be offset by private transfers from the worker to the employer. In this paper, using a dynamic search and matching model a la Mortensen and Pissarides (1994), we show that it may be not any more the case if labor contracts are incomplete and can be renegotiated by mutual agreement only. Indeed, we show that increases in high severance payments are likely to decrease unemployment but systematically decrease welfare and raise inequality. Moreover, it can be understood that insiders try to get high severance payments through political channels, although they do not fight for such a type of advantage at the firm level.
Subjects:Unemployment
job protection
severance payments
renegotiation
JEL:J41
H29
J64
J38
J23
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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