The employment effects of severance payments with wage rigidities

Pietro Garibaldi, Giovanni L. Violante

Research output: Contribution to journalReview articlepeer-review

90 Scopus citations


Firing costs have two separate dimensions: a transfer from the firm to the laid-off worker and a tax paid outside the firm-worker pair. To avoid the 'bonding critique' most of the existing literature implicitly assumes that, in the presence of wage rigidity, transfers have the same real effects as taxes. This paper shows that this presumption is in general misplaced, especially so when the degree of wage rigidity is endogenous. The predictions of our theory find empirical support in a panel data-set of OECD countries.

Original languageEnglish (US)
Pages (from-to)799-832
Number of pages34
JournalEconomic Journal
Issue number506
StatePublished - Oct 2005

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


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