Severance Pay and the Shadow of the Law: Evidence for West Germany

Due to the complexity of employment protection legislation (EPL) in Germany, there is notable uncertainty about the outcomes of dismissal conflicts. In this study we focus on severance pay and inquire whether its incidence and level varies in a systematic manner with the legal rules as defined by labour as well as tax law. We start with a theoretical model that generates the main observable outcomes of dismissal conflicts as potential equilibrium situations. Using German panel data (GSOEP), we put our theoretical model to an empirical test. Our main result is that the shadow of the law matters. Criteria regarding the validity of dismissals either found in respective legislation or defined by labour courts significantly affect the incidence and magnitude of severance pay. Moreover, restrictive changes in the taxation of severance pay have a negative causal impact on its incidence.

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Year of publication:	2005
Authors:	Goerke, Laszlo ; Pannenberg, Markus
Publisher:	Berlin : Deutsches Institut für Wirtschaftsforschung (DIW)
Subject:	Abfindung \| Kündigungsschutz \| Steuerrechtsprechung \| Spieltheorie \| Schätzung \| Theorie \| Deutschland \| severance pay \| labour law \| taxation \| sample selection \| survey data

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Series:	DIW Discussion Papers ; 541
Type of publication:	Book / Working Paper
Type of publication (narrower categories):	Working Paper
Language:	English
Other identifiers:	505104687 [GVK] hdl:10419/18434 [Handle] RePEc:diw:diwwpp:dp541 [RePEc]
Classification:	J65 - Unemployment Insurance; Severance Pay; Plant Closings ; K31 - Labor Law ; C24 - Truncated and Censored Models ; H24 - Personal Income and Other Nonbusiness Taxes and Subsidies ; C23 - Models with Panel Data
Source:	EconStor

Persistent link: https://www.econbiz.de/10010260929