In this study we examine the contribution of severance pay to employment and
unemployment development using data on industrialized OECD countries. Our starting point
is Lazear’s (1990) empirical dictum that severance payment requirements adversely impact
the labor market. We extend his sample period and add to his parsimonious specification a
variety of fixed and time-varying labor market institutions. While the positive effect of
severance pay on unemployment garners some support, there is no real indication of
adverse effects for (the three) other employment outcomes identified here. Moreover, with
the possible exception of collective bargaining coordination, the role of institutions is also
more muted than suggested in the literature.
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