The Effect of Dismissals Protection on Employment: More on a Vexed Theme

Abstract

This paper presents new results on the relationship between severance pay and labor market performance for a sample of 21 OECD countries, 1956-84. Specifically, it evaluates Lazear's (1990) empirical argument that severance pay reduces employment and elevates joblessness. His findings are shown not to survive correction for errors in the data and the application of correct estimation procedures. Furthermore, adverse labor market consequences of severance pay are not detected in a dynamic characterization of the Lazear model. Limitations of the approach followed here-the focus on a single measure of employment protection and the parsimonious nature of the reduced form model-are also addressed and contextualized. JEL Codes: E24; J65. We thank, without implicating, two anonymous referees and Co-editor Kathy Hayes for helpful comments on earlier drafts of this paper.

Severance payments for dismissed employees in Germany

“…Several studies examine the effects of severance payments on aggregated employment and unemployment as well as on firm and individual behaviour: Using aggregated data from more than 20 countries during the years 1956 to 1984 Lazear (1990) finds evidence for employment reductions of severance pay requirements in Europe. Addison and Grosso (1996) as well as Addison et al (2000) relativise this result. Within a more detailed analysis they find no significant effect of severance payments on the unemployment rate.…”

The economics of employment protection

“…As we shall see, these criticisms were to shape the course of 9 empirical work over the following decade. Interestingly, much less criticism was directed at errors in Lazear's raw data and the frailties of his estimation procedures (see, respectively, Addison and Grosso, 1996;Addison et al, 2000). Suffice it to say here that errors of omission and commission in data, while material, do not overturn his findings but that proper accounting for country heterogeneity and serial correlation seemingly do.…”

“…We do not further discuss the Lazear study or its replication by Addison et al (2000) in the first two rows of the table. The preponderance of the remaining studies support the Lazear conjecture that countries with stricter employment protection rules have lower employment-population ratios (and possibly lower employment growth as well).…”

Structural Reforms in Latin America Under Scrutiny

“…Regarding the evidence on the effects of job security on unemployment Elmeskov, Martin and Scarpetta. (1998), Lazear (1990), and Addison and Grosso (1996) find a positive link while Blanchard (1998), Heckman and Pagés-Serra (2000), Nickell (1997) and Addison and Grosso (2000) find no effect. 20 Pagés and Montenegro (1999), Heckman and Pagés-Serra (2000).…”