Earnings-Related Severance Pay

21 Pages Posted: 10 Aug 2006

See all articles by Laszlo Goerke

Laszlo Goerke

University of Trier - Institute of Labour Law and Industrial Relations in the European Union; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

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Date Written: July 2006

Abstract

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

Goerke, Laszlo, Earnings-Related Severance Pay (July 2006). IZA Discussion Paper No. 2232, Available at SSRN: https://ssrn.com/abstract=923536

Laszlo Goerke (Contact Author)

University of Trier - Institute of Labour Law and Industrial Relations in the European Union ( email )

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