Do larger severance payments increase individual job duration?

Abstract

This paper analyzes the effect of severance payments on the probability of separation at given tenure, wages and other individual and firm characteristics. It studies a mandatory deferred wage scheme of the Italian labour market (Trattamento di Fine Rapporto, TFR). Deferred wages increase job duration if two conditions hold: wages are rigidly set outside the employer-employee relationship, and past provisions are accumulated at interest rates that are below market rates. Under such circumstances, workers who withdraw from their accumulated stock of unpaid wages should experience, at given tenure, a subsequent increase in the probability of separation. This prediction appears empirically robust and quantitatively sizeable. A withdrawal of 60% of the TFR stock (the median observed withdrawal) increases the instantaneous hazard rate by almost 20%. In other words, an individual with at least ten years of tenure that experiences an early withdrawal increases his/her hazard rate from 10% to about 12%. The empirical result takes into account the existence of unobserved heterogeneity and a variety of further robustness tests.

Workers and Firms Sorting into Temporary Jobs

“…Temporary arrangements include fixed-term direct-hires, apprenticeship, temporary agency work, training and independent contracts. Finally, as usually done with administrative data (Garibaldi and Pacelli, 2008), we dropped all the spells lasting up to two months as they may hide voluntary job-to-job transitions and thus a relevant share of the search activity. As full liberalisation of temporary contracts was enforced in Italy at the end of 2001, we select all the unemployment spells started from January 2002 and experienced by workers who entered the labour market in 1998 or later at the age of 19-29.…”

An analysis of the effects of the severance payment reform on credit to Italian SMEs

“…The reason for our choice is the following: if we assume that the optimal capital structure is quite stable across time, the leverage ratio we observe should correspond to the optimal ratio between the flow of external finance and the total capital flow. Guiso (2003) measures this ratio for Italian manufacturing firms from a survey of over 4,000 firms (mostly small and medium-sized) conducted in 1999 by Mediocredito Centrale, obtaining a median value of 23.1% and an average value of 32.2%. We use these two statistics as an estimate of I b /I.…”

“…a Guiso (2003) b Lower and upper bounds from Capitalia (2003) c Huelsewig, Mayer and Wollmershaeuser (2005); King (1986) Note: by rearranging equation (8) we obtain…”

“…Sapienza (1997) disentangles the determinants of the demand and the supply of credit and concludes that loans supply is significantly correlated with assets tangibility. Guiso (2003) shows that size is a major determinant of the probability of success in obtaining as much bank finance as needed: firms with less than approximately 30 employees are twice less likely to have financial debt than bigger firms, and this probability is strongly and positively correlated with the quota of tangible assets over total assets. From these observations, he concludes that "firms' ability to pledge collateral strengthens their capacity to borrow, in particular when bank-firm relationships are not well established".…”

“…Finally, we use data from Guiso (2003) to obtain the average leverage of SMEs towards financial institutions. Our simulations predict that the decrease of SMEs investment due to the reform will be equal to 130-147% of the outflow of TFR in the long run.…”