IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/3636.html
   My bibliography  Save this paper

Firing Tax and Severance Payment in Search Economies: A Comparison

Author

Listed:
  • Garibaldi, Pietro
  • Violante, Giovanni

Abstract

Employment Protection rules have two separate dimensions: a transfer from the firm to the worker to be laid off and a tax paid outside the firm-worker pair. It is well established that with full wage flexibility statutory severance payments (pure transfers) between employers and dismissed employees are neutral (Lazear 1988, 1990). Most of the existing literature makes the implicit assumption that, in the presence of wage rigidity, such mandatory transfers have the same real effects as firing taxes. This Paper shows, in the context of a search model, that this presumption is in general misplaced. It is only correct in the case of extreme wage rigidity, whereas when some (but not full) flexibility in the wage setting at the level of an individual employer-worker match is allowed, the impact of severance payments on unemployment duration and incidence is qualitatively different from that of firing taxes (and its sign depends on the nature of the wage rigidity).

Suggested Citation

  • Garibaldi, Pietro & Violante, Giovanni, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3636
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP3636
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
    2. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
    3. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 699-726.
    4. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 381-402.
    5. Bentolila, S. & Saint-Paul, G., 1995. "A model of labour demand with linear adjustment costs," Labour Economics, Elsevier, vol. 2(1), pages 105-105, March.
    6. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
    7. McLaughlin, Kenneth J, 1991. "A Theory of Quits and Layoffs with Efficient Turnover," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 1-29, February.
    8. Iversen, Torben, 1998. "Wage Bargaining, Central Bank Independence, and the Real Effects of Money," International Organization, Cambridge University Press, vol. 52(3), pages 469-504, July.
    9. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
    10. Christopher Erickson & Andrea Ichino, 1995. "Wage Differentials in Italy: Market Forces, Institutions, and Inflation," NBER Chapters, in: Differences and Changes in Wage Structures, pages 265-306, National Bureau of Economic Research, Inc.
    11. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    12. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 43-61.
    13. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    14. Jose E. Galdon-Sanchez & Maia Guell, 2000. "Let's Go To Court! Firing Costs and Dismissal Conflicts," Working Papers 823, Princeton University, Department of Economics, Industrial Relations Section..
    15. Maia Guell, 2000. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 812, Princeton University, Department of Economics, Industrial Relations Section..
    16. Cahuc, Pierre & Zylberberg, Andre, 1999. "Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare," IZA Discussion Papers 96, Institute of Labor Economics (IZA).
    17. Guell, Maia, 2000. "Fixed-term contracts and unemployment: an efficiency wage analysis," LSE Research Online Documents on Economics 20181, London School of Economics and Political Science, LSE Library.
    18. Maia Guell, 2000. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 812, Princeton University, Department of Economics, Industrial Relations Section..
    19. Jose Galdon-Sanchez & Maia Guell, 2000. "Let's go to court! Firing costs and dismissal conflicts," Working Papers 823, Princeton University, Department of Economics, Industrial Relations Section..
    20. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627, Elsevier.
    21. Pietro Garibaldi & Paolo Mauro, 2002. "Anatomy of employment growth [‘Growth and unemployment’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(34), pages 67-114.
    22. Giulio Fella, 1999. "When Do Firing Costs Matter?," Working Papers 400, Queen Mary University of London, School of Economics and Finance.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alessandria, George & Delacroix, Alain, 2008. "Trade and the (dis)incentive to reform labor markets: The case of reform in the European Union," Journal of International Economics, Elsevier, vol. 75(1), pages 151-166, May.
    2. Jean-Olivier Hairault & Francois Langot & Arnaud Cheron, 2007. "Job creation and job destruction over the life cycle," 2007 Meeting Papers 431, Society for Economic Dynamics.
    3. Usui, Emiko, 2007. "Severance payments in equilibrium unemployment," Economics Letters, Elsevier, vol. 94(3), pages 342-347, March.
    4. Fiaschi, Davide & Tealdi, Cristina, 2020. "Winners and Losers of Immigration," IZA Discussion Papers 13600, Institute of Labor Economics (IZA).
    5. Ferrari, Filippo, 2011. "Lo sviluppo delle competenze nei contesti precari [Skills development in precariousness: the dark side of flexibility?]," MPRA Paper 33284, University Library of Munich, Germany.
    6. Bolli, Thomas & Kemper, Johanna, 2015. "Evaluating the Impact of Employment Protection on Firm-Provided Training in an RDD Framework," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112895, Verein für Socialpolitik / German Economic Association.
    7. Pilar García-Martínez & Miguel Malo, 2007. "The strategic use of dismissal legislation: an empirical analysis using Spanish data," European Journal of Law and Economics, Springer, vol. 23(2), pages 151-167, April.
    8. Burguet, Roberto & Caminal, Ramon, 2008. "Does the market provide sufficient employment protection?," Labour Economics, Elsevier, vol. 15(3), pages 406-422, June.
    9. Victoria Osuna & Jose-Ignacio García-Pérez, 2012. "The effects of introducing a single open-ended contract in Spain," EcoMod2012 3825, EcoMod.
    10. Arnaud Chéron & Jean-Olivier Hairault & François Langot, 2009. "The Role of Institutions in Transatlantic Employment Differences: A Life-Cycle View," Annals of Economics and Statistics, GENES, issue 95-96, pages 121-138.
    11. Parello, Carmelo Pierpaolo, 2011. "Labor market rigidity and productivity growth in a model of innovation-driven growth," Economic Modelling, Elsevier, vol. 28(3), pages 1058-1067, May.
    12. Wang, Cheng, 2006. "Equilibrium Layoff As Termination of a Dynamic Contract," Staff General Research Papers Archive 12704, Iowa State University, Department of Economics.
    13. Hairault, Jean-Olivier & Chéron, Arnaud & Langot, François, 2007. "Job Creation and Job Destruction over the Life Cycle: The Older Workers in the Spotlight," IZA Discussion Papers 2597, Institute of Labor Economics (IZA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marco Leonardi & Giovanni Pica, 2013. "Who Pays for it? The Heterogeneous Wage Effects of Employment Protection Legislation," Economic Journal, Royal Economic Society, vol. 123(12), pages 1236-1278, December.
    2. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute of Labor Economics (IZA).
    3. Ahrens, Steffen & Wesselbaum, Dennis, 2009. "On the introduction of firing costs," Kiel Working Papers 1559, Kiel Institute for the World Economy (IfW Kiel).
    4. Etienne Lale, 2019. "Labor-market Frictions, Incomplete Insurance and Severance Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 411-435, January.
    5. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.
    6. Marco Leonardi & Giovanni Pica, 2007. "Employment Protection Legislation and Wages," CSEF Working Papers 175, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    7. Moon, Weh-Sol, 2011. "Endogenous labor force participation and firing costs," Labour Economics, Elsevier, vol. 18(5), pages 607-623, October.
    8. Kugler, Adriana & Saint-Paul, Gilles, 2000. "Hiring and Firing Costs, Adverse Selection and Long-term Unemployment," IZA Discussion Papers 134, Institute of Labor Economics (IZA).
    9. repec:pri:indrel:dsp011j92g746j is not listed on IDEAS
    10. Cozzi, Marco & Fella, Giulio, 2016. "Job displacement risk and severance pay," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 166-181.
    11. Victor Aguirregabiria & Cesar Alonso-Borrego, 2014. "Labor Contracts And Flexibility: Evidence From A Labor Market Reform In Spain," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 930-957, April.
    12. Marloes de Graaf-Zijl, 2005. "The Attractiveness of Temporary Employment to Reduce Adjustment Costs," Tinbergen Institute Discussion Papers 05-121/3, Tinbergen Institute.
    13. Tito Boeri & Michael C. Burda, 2009. "Preferences for Collective Versus Individualised Wage Setting," Economic Journal, Royal Economic Society, vol. 119(540), pages 1440-1463, October.
    14. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.
    15. Michau, Jean-Baptiste, 2015. "Optimal labor market policy with search frictions and risk-averse workers," Labour Economics, Elsevier, vol. 35(C), pages 93-107.
    16. Alain Delacroix, 2003. "Transitions into Unemployment and the Nature of Firing Costs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 651-671, July.
    17. Cabrales, Antonio & Hopenhayn, Hugo A., 1997. "Labor-market flexibility and aggregate employment volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46(1), pages 189-228, June.
    18. Camille Signoretto, 2016. "Mutually agreed termination, job destruction and dismissals: An empirical analysis based on French firm data (2006-2009)," Post-Print hal-01446429, HAL.
    19. Claudio Montenegro & Carmen Pagés-Serra, 2003. "¿Quién se beneficia con la normativa de los mercados laborales?: Chile, 1960-1998," Research Department Publications 4346, Inter-American Development Bank, Research Department.
    20. Lars Ljungqvist, 2002. "How Do Lay--off Costs Affect Employment?," Economic Journal, Royal Economic Society, vol. 112(482), pages 829-853, October.
    21. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2000), pages 109-154, August.

    More about this item

    Keywords

    Firing tax; Severance payment; Wage rigidity; Unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3636. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.