The effect of dismissals protection on employment: More on a vexed theme

This paper presents new results on the relationship between severance pay a nd labor market performance for a sample of 21 OECD countries, 1956-1984. S pecifically, it evaluates Lazear's empirical argument that severance pay re duces employment and elevates joblessness. His findings are shown not to su rvive correction for errors in the data and the application of correct esti mation procedures. Furthermore, adverse labor market consequences of severa nce pay are not detected in a dynamic characterization of the Lazear model. Limitations of the approach followed here are also addressed and contextua lized.