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Severance Payments and Firm–specific Human Capital
Author(s) -
Suedekum Jens,
Ruehmann Peter
Publication year - 2003
Publication title -
labour
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.403
H-Index - 34
eISSN - 1467-9914
pISSN - 1121-7081
DOI - 10.1111/1467-9914.00221
Subject(s) - severance , payment , incentive , labour economics , human capital , economics , capital (architecture) , investment (military) , business , microeconomics , finance , market economy , archaeology , politics , political science , law , history
What effect does employment protection through severance payments have on the behaviour of employed workers? We analyse this issue within a stochastic two–period framework where workers decide on human capital investments and find two competing effects: severance payments imply higher job security that fosters human capital formation. At the same time, a lay–off is perceived by the workers to be a weaker penalty if severance payments are provided. This incentive lowers their optimal amount of firm–specific investments. Which effect prevails on balance depends on the distribution of investment returns among firm and workers. For strong positive reactions, employment protection is also in the interests of the firm.