The Effect of Dismissals Protection on Employment: More on a Vexed Theme

Abstract

This paper presents new results on the relationship between severance pay and labor market performance for a sample of 21 OECD countries, 1956-84. Specifically, it evaluates Lazear's (1990) empirical argument that severance pay reduces employment and elevates joblessness. His findings are shown not to survive correction for errors in the data and the application of correct estimation procedures. Furthermore, adverse labor market consequences of severance pay are not detected in a dynamic characterization of the Lazear model. Limitations of the approach followed here - the focus on a single measure of employment protection and the parsimonious nature of the reduced form model - are also addressed and contextualized