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Why Do Firms Offer ‘Employment Protection’?
Author(s) -
PISSARIDES CHRISTOPHER A.
Publication year - 2010
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2010.00861.x
Subject(s) - severance , dismissal , unemployment , labour economics , incentive , moral hazard , consumption (sociology) , economics , compensation (psychology) , notice , microeconomics , law , economic growth , psychology , social science , sociology , political science , psychoanalysis
This paper derives optimal employment contracts when workers are risk‐averse and there are employment and unemployment risks. Without income insurance, consumption rises during employment and falls during unemployment. Optimal employment contracts offer severance compensation and sometimes give notice before dismissal. Severance compensation smooths consumption during employment, and dismissal delays insure partially against the unemployment risk because of moral hazard. During the delay, consumption falls to give incentives to the worker to search for another job. No dismissal delays are optimal if exogenous unemployment compensation is sufficiently generous.