Understanding the Determination of Severance Pay: Mandates, Bargaining, and Unions

Stéphane Auray (1) , Samuel Danthine (2) , Markus Poschke

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz]

Asubstantial share of severance payments derives from private contracts or collective agreements. In this paper, we study the determination of these payments. We analyze joint bargaining over wages and severance payments in a search-and-matching model with risk-averse workers. Individual bargaining results in levels of severance pay that provide full insurance, but also depend on unemployment benefits and job-finding rates. Unions also choose full insurance. Because their higher wage demands reduce job creation, this requires higher severance pay. Severance pay observed in eight European countries, to which we calibrate the model, lies between predictions from the bargaining and union scenarios.

Keywords: Bargaining; Severance pay; Unemployment insurance; Unions

Domains: Humanities and Social Sciences; Economics and Finance

Stéphane Auray, Samuel Danthine, Markus Poschke. Understanding the Determination of Severance Pay: Mandates, Bargaining, and Unions. Scandinavian Journal of Economics, 2020, 122 (3), pp.1073 - 1111. ⟨10.1111/sjoe.12367⟩. ⟨hal-03455965⟩