Earnings-Related Severance Pay

22 Pages Posted: 7 Dec 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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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 lump-sum component reduces employment. Thus, the prevalent form of severance payments in OECD countries might have less advantageous employment effects than previously conjectured.

Suggested Citation

Goerke, Laszlo, Earnings-Related Severance Pay. Labour, Vol. 20, No. 4, pp. 651-672, December 2006, Available at SSRN: https://ssrn.com/abstract=950086 or http://dx.doi.org/10.1111/j.1467-9914.2006.00359.x

Laszlo Goerke (Contact Author)

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

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