Abstract
Abstract. In an efficiency wage economy, lump‐sum severance pay from which shirkers can be excluded raises employment. However, severance payments are usually related to wages. It is shown that earnings‐related, mandated severance pay will have ambiguous employment effects if effort can be varied continuously. A substitution of the earnings‐related for the lump‐sum component reduces employment. Thus, the prevalent form of severance payments in OECD countries might have less advantageous employment effects than previously conjectured.
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