Earnings-Related Severance Pay
21 Pages Posted: 10 Aug 2006
Date Written: July 2006
In an efficiency wage economy, lump-sum severance pay from which shirkers can be excluded raises employment. However, severance payments are usually related to wages. It is shown that earnings-related, mandated severance pay will have ambiguous employment effects if effort can be varied continuously. A substitution of the earnings-related for the lumpsum component reduces employment. Thus, the prevalent form of severance payments in OECD countries might have less advantageous employment effects than previously conjectured.
Keywords: earnings relationship, efficiency wages, employment, severance pay
JEL Classification: J32, J41, J65
Suggested Citation: Suggested Citation