Severance payments: main effects and determinants on the labour market

This article presents a survey of the recent empirical literature analysing both the effects and determinants of severance pay on the labour market. Redundancy payments have an effect notably on the aggregate employment level, workers’ job satisfaction, risk-taking and mobility, the nature of the labour contracts (i.e. open-ended or short-term contracts), and the reasons for dismissal (i.e. economic layoff or redundancy for misconduct), while their main determinants are related to union coverage and membership, the aggregate unemployment rate, fiscal policy, judges’ behaviour and some workers’ individual characteristics (e.g. gender, tenure). Insofar as this literature provides a better understanding of the incentives produced by legal rules related to layoffs, it is clear that its conclusions may have implications for policy-making, which we try to illustrate in this article.