Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89854
Authors: 
Parsons, Donald O.
Year of Publication: 
2013
Series/Report no.: 
IZA Discussion Paper 7641
Abstract: 
Severance pay, a fixed-sum payment to workers at job separation, has been the focus of intense policy concern for the last several decades, but much of this concern is unearned. The design of the ideal separation package is outlined and severance pay emerges as a natural component of job displacement insurance packages, serving both as scheduled reemployment wage insurance and, if search moral hazard is a problem, as scheduled UI. Like any firm-financed separation expenditure, severance pay can induce excessive job retention, but such distortions do not appear to be of practical significance at benefit levels typically mandated in the industrialized world. Moreover there is no evidence that firms attempt to avoid these firing cost distortions by substituting severance savings plans, which have zero firing costs. Indeed severance insurance plans similar to those mandated are often offered voluntarily in the U.S. The appropriate role of government in the market for severance pay is briefly considered.
Subjects: 
severance pay
job displacement
firing costs
unemployment insurance
moral hazard
JEL: 
J65
J41
J33
J08
Document Type: 
Working Paper

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