Authors: Wiljan van den Berge
Published: 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 efforts.
Yet, we know very little about the net effects of these policies. This paper uses multistate duration models to examine the joint effects 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 offer of job search assistance for each displaced worker is combined with administrative data on employment status of workers in the Netherlands. The effects are identied 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 findings. First, social compensation plans have a positive effect 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-finding probability declines. Third, social compensation plans have a negative effect on subsequent job quality in terms of wages.See publication