Kiel Working Papers, Kiel Institute for World Economics
No 1644:
Firing Tax vs. Severance Payment - An Unequal Comparison
Dennis Wesselbaum
Abstract: Empirical evidence indicates that lay-off costs consist of
two elements, namely firing costs and severance payments. This paper
investigates business cycle and steady state effects of firing costs and
severance payments and discusses the differences. We find that severance
payments imply a lower volatility of key labor market variables compared
with firing costs. Persistently increasing those costs, reduces the welfare
in the model economy but increases employment. The reason for the different
performance is the impact on the wage and the additional stimulus caused by
severance payments. The social planner therefore faces a trade-off in the
design of employment protection. Furthermore, the design of lay-off costs
also has strong implications for the design of other elements of employment
protection
Keywords: Firing Costs, Severance Payments, Welfare; (follow links to similar papers)
JEL-Codes: D61,; E24,; E32; (follow links to similar papers)
21 pages, August 2010
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