Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/33704
Authors: 
Feng, Shuaizhang
Parsons, Donald O.
Year of Publication: 
2006
Series/Report no.: 
IZA Discussion Papers 2238
Abstract: 
Displaced workers, especially long tenured workers, face large human capital losses. Private firms frequently offer insurance against this threat in the form of severance pay - scheduled benefits linked in expectation to the worker's human capital loss. We explore this linkage, first reviewing common severance benefit algorithms and then comparing them with simple models of capitalized job displacement losses on data from the Displaced Worker Surveys of 2000 and of 2004. The standard benefit formula of one week's pay per year of service offers payments roughly in proportion to expected capital losses, but with a proportionality factor of only one quarter of capitalized losses (at 9 percent). Despite the systematic relationship between tenure/age and displacement losses, these factors explain little of the total variation in displacement losses, raising obvious insurance efficiency concerns. Cross-sectional estimates from more complete models, however, uncover no admissible factors currently neglected in standard severance contracts, although the jump in earnings losses between displacements in the robust market of 1997-1999 and the difficult labor market of 2000-2003 does suggest conditioning benefits on market conditions.
Subjects: 
job displacement
severance pay
unemployment insurance
JEL: 
J65
J41
J33
Document Type: 
Working Paper

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