Job Security and Severance Pay Exemption in Recession

Time: Tuesday January 22nd, 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Gerard Pfann (UM)

Discussant: Rob Euwals (CPB)

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject: This paper presents a policy analysis to secure jobs in times of recession. We study a unique feature of Dutch labor market that focuses on the probability for firms to obtain severance pay exemption in times of distress. A basic theoretical equilibrium model is presented to analyze the policy's effects. The model predicts that as long as the wage elasticity of labor demand does not exceed the inverse of the replacement ratio a system of severance payment exemption is less costly than the alternative of additional unemployment benefits. The likelihood that this condition holds increases when a firm is hit by a negative shock. A novel data set identifies key differences in procedural durations and firing costs distributions with and without the exemption policy for individual dismissal cases during the period 2006-2009. We claim that these differences form the most important reasons to explain the outstanding performance of the Dutch labor market compared to other EU countries in the past decade.

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