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When Protection Becomes Exploitation: The Impact of Firing Costs on Present-Biased Employees

Author

Listed:
  • Florian Englmaier
  • Matthias Fahn
  • Ulrich Glogowsky
  • Marco A. Schwarz
  • Marco Alexander Schwarz
Abstract
Employment protection harms early-career employees without benefitting them in later career stages (Leonardi and Pica, 2013). We demonstrate that this pattern can result from employers exploiting naïve present-biased employees. Employers offer a dynamic contract with low early-career wages, an unattractive intermediate qualification stage, and high end-of-career wages. Upon reaching the qualification stage, present-biased employees exchange future wages for immediate rewards on an alternative career path – a choice unanticipated by their previous, naïve, self. Thus, employers never pay high future wages. Firing costs help employers indicate that they will not oust employees instead of making promised payments, enabling early-career wage cuts.

Suggested Citation

  • Florian Englmaier & Matthias Fahn & Ulrich Glogowsky & Marco A. Schwarz & Marco Alexander Schwarz, 2023. "When Protection Becomes Exploitation: The Impact of Firing Costs on Present-Biased Employees," CESifo Working Paper Series 10848, CESifo.
    • Handle: RePEc:ces:ceswps:_10848
    as

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    References listed on IDEAS

    as
    1. Matthias Fahn, 2017. "Minimum Wages and Relational Contracts," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(2), pages 301-331.
    2. Bertola, Giuseppe & Rogerson, Richard, 1997. "Institutions and labor reallocation," European Economic Review, Elsevier, vol. 41(6), pages 1147-1171, June.
    3. Heidhues, Paul & Köszegi, Botond, 2018. "Behavioral Industrial Organization," CEPR Discussion Papers 12988, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    employment protection laws; present bias; dynamic contracting;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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