What Have We Learned about the Employment Effects of Severance Pay? Further Iterations of Lazear Et al.

In this study we examine the effect of severance pay on employment and unemployment, using data on industrialized OECD countries. Our starting point is Lazear’s (1990) Quarterly Journal of Economics 105, 699–726] dictum that severance payment requirements unfavorably 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 in respect of the other employment outcomes identified here, namely, the employment-population ratio, the labor force participation rate, and long-term unemployment. Moreover, with the possible exception of collective bargaining coordination, the role of institutions is also more muted than suggested in the literature. We thank, without implicating, an anonymous referee for most helpful comments on the first draft of this paper.