November 2003

IZA DP No. 943: What Have We Learned About the Employment Effects of Severance Pay? Further Iterations of Lazear et al.

published in: Empirica, 2005, 32 (3-4), 345-368

In this study we examine the contribution of severance pay to employment and unemployment development using data on industrialized OECD countries. Our starting point is Lazear’s (1990) empirical dictum that severance payment requirements adversely impact the labor market. We extend his sample period and add to his parsimonious specification a variety of fixed and time-varying labor market institutions. While the positive effect of severance pay on unemployment garners some support, there is no real indication of adverse effects for (the three) other employment outcomes identified here. Moreover, with the possible exception of collective bargaining coordination, the role of institutions is also more muted than suggested in the literature.