Fella, Giulio
(2000)
Noncompetitive labour markets, severance payments and unemployment.
PhD thesis, London School of Economics and Political Science.
Abstract
The dissertation analyses the possible welfare-enhancing role of severance payments when labour markets are non-competitive. Chapter 1 introduces the material in the thesis. Chapter 2 presents a short survey of the results of the existing literature on dismissal costs. Chapter 3 uses a strategic bargaining model to show that, once dismissal costs are correctly modelled as a payment which takes place only in case firms sever the relationship, firing costs cannot affect the separation rate in models featuring voluntary severance in the absence of restrictions. Firms will always find it profitable to induce workers to quit whenever separation is efficient. Only if some other source of inefficiency prevents firms and workers to split the rents from continuation can firing costs result in a reduced number of separations. In this case they may be efficient. Chapter 4 analyses non-contractible firms' investment in general training in the presence of frictional unemployment. It argues that consensual layoff measures and other institutions that oblige firms to share the total separation payoff result in higher training. Since general training is vested in the worker on separation, in the absence of such measures, the firm would not capture any return to training in case of separation. Chapter 5 shows that in a dynamic efficiency wage model the time-inconsistency of firing decisions implies that severance payments increase aggregate employment and are second-best Pareto optimal as they induce firms to internalise the negative externality, in the form of foregone rents, that they impose on workers on severance. Chapter 6 concludes.
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