The Labor Market Effects of the Austrian Severance Pay Reform Revisited - A Theoretical Analysis
Joint work with Ines Fortin and Helmut Hofer
Abstract
The paper analyzes the 2002 reform of the Austrian severance payment system towards a regime of individual savings accounts funded through regular firm contributions. We present parsimonious labor market models to capture the fundamental labor market aspects of this specific reform. We show that if firms are credit constrained job creation and job destruction should increase leaving an unambiguous employment effect. We further show that employment reallocation through job-to-job quitters should increase in the new system implying productivity gains from labor reallocation while output is at the same time reduced again because of dampened investment into worker-specific human capital. Concerning this last trade-off, a first-best solution is not attainable in any of the two systems (nor a mixture). A second-best is characterized by a sufficiently small but positive classical severance payment regime.