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Title:Severance packages PDF Logo
Authors:Postel-Vinay, Fabien
Turon, Hélène
Issue Date:2011
Series/Report no.:Discussion Paper series, Forschungsinstitut zur Zukunft der Arbeit 6023
Abstract:Job-to-job turnover provides a way for employers to escape statutory firing costs, as unprofitable workers may willfully quit their job on receiving an outside offer, thus sparing their incumbent employer the firing costs. Furthermore, employers can induce their unprofitable workers to accept outside job offers that they would otherwise reject by offering voluntary severance packages, which are less costly than the full statutory firing cost. We formalize those mechanisms within an extension of the Diamond-Mortensen-Pissarides (DMP) matching model that allows for employed job search and negotiation over severance packages. We find that, while essentially preserving most standard qualitative predictions of the DMP model without employed job search, our model explains why higher firing costs intensify job-to-job turnover at the expense of transitions out of unemployment. We further find that allowing for on-the-job search markedly changes the quantitative predictions of the DMP model regarding the impact of firing costs on unemployment and employment flows: ignoring on-the-job search leads one to strongly underestimate the negative impact of firing costs on unemployment.
Subjects:firing costs
on-the-job search
mutual consent
minimum wage
JEL:J33
J64
E24
Persistent Identifier of the first edition:urn:nbn:de:101:1-201110263632
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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