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Redundancy Pay and Collective Dismissals

Redundancy Pay and Collective Dismissals

Redundancy payments for collective dismissals are incorporated into a
Shapiro-Stiglitz model of efficiency wages. It is shown that a fixed payment
will lower wages, leave employment and welfare unaffected if there are no
wage-dependent taxes, no additional firing costs and if unemployment
benefits are not altered by redundancy payments. If payroll taxes exceed
firing costs and unemployment benefits are independent of redundancy pay,
employment and welfare will rise with redundancy payments. If these
payments are also a function of previous wages, positive employment effects
will be mitigated. A substitution of wage-dependent for lump-sum redundancy
payments can lower employment, allowing for a continuous variation of
effort.