Understanding the Determination of Severance Pay: Mandates, Bargaining, and Unions

A substantial share of severance payments derives from private contracts or collective agreements. In this paper, we study the determination of these payments. We analyze joint bargaining over wages and severance payments in a search‐and‐matching model with risk‐averse workers. Individual bargaining...

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Bibliographic Details
Published in:The Scandinavian journal of economics 2020-07, Vol.122 (3), p.1073-1111
Main Authors: Auray, Stéphane, Danthine, Samuel, Poschke, Markus
Format: Article
Language:English
Subjects:
Bargaining
Collective agreements
Economics and Finance
Humanities and Social Sciences
Insurance
Job creation
Labor unions
Payments
Severance pay
Severance payments
Unemployment benefits
unemployment insurance
unions
Wages & salaries
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Summary:A substantial share of severance payments derives from private contracts or collective agreements. In this paper, we study the determination of these payments. We analyze joint bargaining over wages and severance payments in a search‐and‐matching model with risk‐averse workers. Individual bargaining results in levels of severance pay that provide full insurance, but also depend on unemployment benefits and job‐finding rates. Unions also choose full insurance. Because their higher wage demands reduce job creation, this requires higher severance pay. Severance pay observed in eight European countries, to which we calibrate the model, lies between predictions from the bargaining and union scenarios.
ISSN:0347-0520
1467-9442
DOI:10.1111/sjoe.12367