Kopafbeelding publicaties CPB

How do severance pay and job search assistance jointly affect unemployment duration and job quality?

CPB Discussion Paper 334, 25 August 2016

Many countries require firms to pay severance pay to workers displaced in a mass layoff .Displaced workers often also receive some form of job search assistance. While these may be useful policies on their own, severance pay could undermine job search assistance eff orts.

Yet, we know very little about the net e ffects of these policies. This paper uses multistate duration models to examine the joint e ffects of severance pay and job search assistance on unemployment duration and wages. A unique dataset of social compensation plans that include both severance pay and an off er of job search assistance for each displaced worker is combined with administrative data on employment status of workers in the Netherlands. The eff ects are identi ed by comparing workers displaced through a bankruptcy, who don't get any compensation, with workers displaced with a social compensation plan. There are three main fi ndings. First, social compensation plans have a positive e ffect on the probability to start a new job right after the current job ends. Second, for those who start an unemployment spell, social compensation plans lead to longer unemployment durations. The overall job-fi nding probability declines. Third, social compensation plans have a negative eff ect on subsequent job quality in terms of wages.

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