Leadership

Severance Pay Mandates: Firing Costs, Hiring Costs, And Firm Avoidance Behaviors

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Executive Summary

The potentially adverse labor market effects of severance pay mandates are a continuing source of policy concern. In a seminal study, Lazear (1990) found that contract avoidance of severance pay firing costs was theoretically simple - a bonding scheme would do - but that empirically the labor market distortions were large. Subsequent empirical work resolved the apparent paradox - firing cost effects are modest even without firm avoidance activities. To explore why that should be so, formal measures of severance-induced firing costs and hiring costs are derived. Firing costs are, it turns out, systematically less than benefit generosity alone would imply.

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