[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/cep/cepdps/dp0542.html
   My bibliography  Save this paper

Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts

Author

Listed:
  • Christopher A. Pissarides
Abstract
This paper derives optimal employment contracts when workers are risk averse and there are employment and unemployment risks. Without income insurance, consumption rises during employment and falls during unemployment. Optimal employment contracts offer severance compensation to smooth consumption during employment without causing moral hazard. A pre-announced delay in dismissal when the job becomes unproductive provides further insurance but because of moral hazard it does not fully smooth consumption. During the delay consumption falls and the worker searches for another job. No delays in dismissals are optimal if exogenous unemployment compensation is sufficiently generous.

Suggested Citation

  • Christopher A. Pissarides, 2002. "Consumption and Savings with Unemployment Risk: Implications for Optimal Employment Contracts," CEP Discussion Papers dp0542, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0542
    as

    Download full text from publisher

    File URL: https://cep.lse.ac.uk/pubs/download/DP0542.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rasmus Lentz & Torben Tranas, 2005. "Job Search and Savings: Wealth Effects and Duration Dependence," Journal of Labor Economics, University of Chicago Press, vol. 23(3), pages 467-490, July.
    2. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    3. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages 1-33, March.
    4. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 699-726.
    5. Lars Ljungqvist & Thomas J. Sargent, 1998. "The European Unemployment Dilemma," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 514-550, June.
    6. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
    7. Gilles Saint-Paul, 2002. "The Political Economy of Employment Protection," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 672-701, June.
    8. Mortensen, Dale T & Pissarides, Christopher A, 1999. "Unemployment Responses to 'Skill-Biased' Technology Shocks: The Role of Labour Market Policy," Economic Journal, Royal Economic Society, vol. 109(455), pages 242-265, April.
    9. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084, Elsevier.
    10. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
    11. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-142, February.
    12. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
    13. Hopenhayn, Hugo A & Nicolini, Juan Pablo, 1997. "Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 412-438, April.
    14. Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 43-61.
    15. Bertola, Giuseppe, 1999. "Microeconomic perspectives on aggregate labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 45, pages 2985-3028, Elsevier.
    16. Edward P. Lazear, 1990. "Job Security and Unemployment," Palgrave Macmillan Books, in: Yoram Weiss & Gideon Fishelson (ed.), Advances in the Theory and Measurement of Unemployment, chapter 9, pages 245-267, Palgrave Macmillan.
    17. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-1362, December.
    18. Burdett, Kenneth & Wright, Randall, 1989. "Unemployment Insurance and Short-Time Compensation: The Effects on Layoffs, Hours per Worker, and Wages," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1479-1496, December.
    19. A. A. Sampson, 1978. "Optimal Redundancy Compensation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 447-452.
    20. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
    21. Gordon, Donald F, 1974. "A Neo-Classical Theory of Keynesian Unemployment," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 431-459, December.
    22. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 937-957, October.
    23. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
    24. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 47-82, June.
    25. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(1), pages 37-50.
    26. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giulio Fella, 2004. "Optimal severance pay in a matching model," 2004 Meeting Papers 794, Society for Economic Dynamics.
    2. Giulio Fella, 2004. "Optimal severance pay in a matching model," 2004 Meeting Papers 794, Society for Economic Dynamics.
    3. Wang, Cheng & Williamson, Stephen, 1996. "Unemployment insurance with moral hazard in a dynamic economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 1-41, June.
    4. Marco Guerrazzi & Pier Giuseppe Giribone, 2022. "The dynamics of working hours and wages under implicit contracts," Bulletin of Economic Research, Wiley Blackwell, vol. 74(4), pages 1075-1094, October.
    5. Egbert Jongen & Sabine Visser, 2010. "Exploring the ambiguous impact of employment protection on employment and productivity," CPB Discussion Paper 148, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Rendon Sílvio, 2006. "Job Search And Asset Accumulation Under Borrowing Constraints ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 233-263, February.
    7. Andersson, Linda, 2008. "Net Taxes,Income Stabilization and Regional Job Flows in Sweden," Working Papers 2008:5, Örebro University, School of Business.
    8. Guler, Bulent & Guvenen, Fatih & Violante, Giovanni L., 2012. "Joint-search theory: New opportunities and new frictions," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 352-369.
    9. Fella Giulio & Tyson Christopher J., 2013. "Privately optimal severance pay," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 415-453, October.
    10. Olivier Blanchard & Jean Tirole, 2004. "The Optimal Design of Unemployment Insurance and Employment Protection. A First Pass," NBER Working Papers 10443, National Bureau of Economic Research, Inc.
    11. Jahn, Elke J. & Wagner, Thomas, 2005. "Contractual Employment Protection and the Scarring Risk of Unemployment," IZA Discussion Papers 1813, Institute of Labor Economics (IZA).
    12. Etienne Lale, 2019. "Labor-market Frictions, Incomplete Insurance and Severance Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 411-435, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christopher A. Pissarides, 2010. "Why Do Firms Offer ‘Employment Protection’?," Economica, London School of Economics and Political Science, vol. 77(308), pages 613-636, October.
    2. Pissarides, Christopher, 2002. "Consumption and Savings with Unemployment Risk: Implications for Employment Contracts," CEPR Discussion Papers 3367, C.E.P.R. Discussion Papers.
    3. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 7, pages Pages: 61, Elsevier.
    4. Milan Vodopivec, 2004. "Income Support for the Unemployed : Issues and Options," World Bank Publications - Books, The World Bank Group, number 14922.
    5. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 283-318.
    6. Robert Shimer & Ivan Werning, 2008. "Liquidity and Insurance for the Unemployed," American Economic Review, American Economic Association, vol. 98(5), pages 1922-1942, December.
    7. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
    8. Stephane Pallage & Christian Zimmermann, 1998. "Voting on Unemployment Insurance Generosity," Cahiers de recherche CREFE / CREFE Working Papers 64, CREFE, Université du Québec à Montréal.
    9. Raj Chetty & Amy Finkelstein, 2012. "Social Insurance: Connecting Theory to Data," NBER Working Papers 18433, National Bureau of Economic Research, Inc.
    10. Wang, Cheng & Williamson, Stephen D., 2002. "Moral hazard, optimal unemployment insurance, and experience rating," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1337-1371, October.
    11. Kjell Erik Lommerud & Odd Rune Straume & Steinar Vagstad, 2018. "Employment Protection and Unemployment Benefits: On Technology Adoption and Job Creation in a Matching Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(3), pages 763-793, July.
    12. Young, Eric R., 2004. "Unemployment insurance and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1683-1710, November.
    13. Stéphane Pallage & Christian Zimmermann, 1999. "Assurance chômage et sociétés," Cahiers de recherche du Département des sciences économiques, UQAM 9904, Université du Québec à Montréal, Département des sciences économiques.
    14. Parsons, Donald O., 2014. "Job Displacement Insurance: An Overview," IZA Discussion Papers 8223, Institute of Labor Economics (IZA).
    15. Vodopivec, Milan & Raju, Dhushyanth, 2002. "Income support systems for the unemployed : issues and options," Social Protection Discussion Papers and Notes 25529, The World Bank.
    16. Andreas Pollak, 2008. "Optimal Unemployment Insurance with Variable Skill Levels," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(4), pages 696-726, December.
    17. Robert Dur & Heiner Schmittdiel, 2019. "Paid to Quit," De Economist, Springer, vol. 167(4), pages 387-406, December.
    18. Rendon Sílvio, 2006. "Job Search And Asset Accumulation Under Borrowing Constraints ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 233-263, February.
    19. L'Haridon, Olivier & Malherbet, Franck, 2009. "Employment protection reform in search economies," European Economic Review, Elsevier, vol. 53(3), pages 255-273, April.
    20. MacLeod, W. Bentley, 2011. "Great Expectations: Law, Employment Contracts, and Labor Market Performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 18, pages 1591-1696, Elsevier.

    More about this item

    Keywords

    employment risk; unemployment risk; severance compensation; notice of dismissal;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp0542. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://cep.lse.ac.uk/_new/publications/discussion-papers/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.