Working Paper: CEPR ID: DP4607
Authors: Pietro Garibaldi; Lia Pacelli
Abstract: This Paper analyses the effect of severance payments on the probability of separation at given tenure, wages and other individual and firm characteristics. It studies a mandatory deferred wage scheme of the Italian labour market (Trattamento di Fine Rapporto, TFR). Deferred wages increase job duration if two conditions hold: wages are rigidly set outside the employer-employee relationship, and past provisions are accumulated at interest rates that are below market rates. Under such circumstances, workers who withdraw from their accumulated stock of unpaid wages should experience, at given tenure, a subsequent increase in the probability of separation. This prediction appears empirically robust and quantitatively sizeable. A withdraw of 60% of the TFR stock (the median observed withdraw) increases the instantaneous hazard rate by almost 20%. In other words, an individual with at least ten years of tenure that experiences an early withdrawal increases his/her hazard rate from 10% to about 12%. A variety of robustness tests support these results.
Keywords: employment protection legislation; severance payments
JEL Codes: J10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Severance payments (J65) | Job duration (C41) |
| Withdrawal of 60% of TFR stock (F16) | Instantaneous hazard rate of job separation (J63) |
| Wages rigidly set outside employer-employee relationship (J39) | Increased probability of separation (C29) |
| Past provisions accumulated at sub-market interest rates (E43) | Increased probability of separation (C29) |