Earnings-related Severance Pay


  • I have benefited from very constructive comments by participants of the workshop on ‘European Labour Markets in Perspective’ in Regensburg, the 15th annual EALE conference in Seville, the annual meeting of the Verein für Socialpolitik in Dresden, by seminar participants in St. Gallen, Mannheim (ZEW), and Bonn (IZA), and by an anonymous referee. Moreover, I am grateful to the German Research Foundation (DFG) for financial support under grant no. 454, ‘Heterogeneous Labor: Positive and Normative Aspects of the Skill Structure of Labor’.

Laszlo Goerke, Department of Economics, Eberhard Karls University Tübingen, Melanchthonstr. 30, D - 72074 Tübingen, Germany. Tel: +49(0)7071-29-74912; Fax: +49(0)7071-29-5590; E-mail: Laszlo.goerke@uni-tuebingen.de.


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.