Andreas Kettemann (University of Zurich), Francis Kramarz (CREST, ENSAE), Josef Zweimüller (University of Zurich)

1. CREATIVE DESTRUCTION & JOB MOBILITY:
FLEXICURITY IN THE LAND OF SCHUMPETER
Andreas Kettemann, University of Zurich
Francis Kramarz, CREST-ENSAE
Josef Zweimüller, University of Zurich
EUI, Florence
November 16, 2017

2. MOTIVATION
“Werner D., close to 50 years old, is a typical middle-class,
white-collar worker (...), prime-earner of his family, financially
burdened with the mortgage of his house.
He hates his job, with all its side effects from high blood pressure to
skin rash. Nevertheless, he will not quit. You don’t throw 750,000
bucks (50,000 Euros) of severance pay out of the window.”
Der Standard, June 5, 2000.

3. MOTIVATION
I This paper evaluates the Austrian 2003 flexicurity reform
(“Abfertigung Neu”)
I Austrian 2003 reform replaced severance pay by occupational pensions.
Often advocated as a role model for reforms in Southern European
countries (see OECD 2006, OECD 2017, EU Commission Green Paper
2006)
I Abolishing high firing costs (typically large severance payments) may
increase labor mobility, reduce labor market segmentation and
unemployment.

4. The OLD system: Severance pay (SP)
I All jobs starting before 2003 were subject to severance pay system.
I After a LAYOFF, firms have to pay a lump-sum amount to the worker.
I Quits and layoffs for cause (misconduct, ...) were not eligible.
I Quits for retirement remained eligible (with 10+ years of tenure).
I Severance payment amount depended on tenure:
I 25 years tenure and more: 12 monthly salaries
I 20 to 24.9 years tenure: 9 monthly salaries
I 15 to 19.9 years tenure: 6 monthly salaries
I 10 to 14.9 years tenure: 4 monthly salaries
I 5 to 9.9 years tenure: 3 monthly salaries
I 3 to 4.9 years tenure: 2 monthly salaries
I 0 to 2.9 years tenure: not eligible

5. The NEW system: Occupational pensions (OP)
I New labor contracts – job starting on January 1, 2003 or later – were
subject to the new OP system.
I Employer has to transfer 1.53 % of monthly salary to a pension account,
on which the employee earns interest.
I If the job is terminated – either through a LAYOFF OR QUIT
I worker still owns the account and transfers it to new employer
I can withdraw a limited amount from the account.
I MAJOR CHANGE IN INCENTIVES
Disincentive to quit is abolished under the new system – for workers with a
high layoff probability.

6. Severance-pay vs occupational-pension schedules
02346912
Sev. Payment/Prev. Wage
3 5 10 15 20 25 30
Tenure (Years)
Before After (3% annual interest rate)

7. Relation to previous literature
I Distressed firms and “early leavers”
I Hamermesh and Pfann (2001), Schwerdt (2011), ... (and earlier literature
on effects of job loss: Jacubson, Lalonde and Sullivan 1993, Stevens 1997,
etc. )
I Other related emipirical literature
I Firing costs and job durations: Garibaldi and Pacelli (2008), ...
I Other papers exploiting Austrian severance pay rules
I Card, Chetty and Weber (2007): liqudity and unemployment duration
I Manoli and Weber (2016): timing of retirement
I Theoretical work on severance pay
I Bentolila, Bertola (1990), Pissarides (1990), Lazear (1990), ...,
Postel-Vinay, Turon (2014), Parsons (2014), Boeri, Garibaldi, Moen (2015)

8. Preview of results
I Reduced form estimates (RDD)
I workers in the new system are more likely to leave in anticipation of a shock
to their firm.
I move more quickly to new jobs (smaller effect on J-U transitions).
I have lower wage increases in job-to-job moves.
I do not respond when their firm is not distressed.
I Incorporating severance pay into a search and matching model
I can replicate job mobility patterns
I predicts that reform slightly reduces unemployment and increases
productivity
I allows counterfactual policy experiments (Southern Europe)

9. DATA
EMPIRICAL STRATEGY

10. Data
I Austrian social security data (ASSD) and tax records (ATD, Austrian tax
records); linked via anonymized social security ID.
I ATD covers all tax files (except public servants) over the period
1994-2012. Has information on actual severance payment (which are
subject to a reduced tax rate). ATD earnings are not top-coded.
I ASSD is a matched firm-worker data set, covers all private sector workers
(⇡ 85 percent of work force) over the period 1972-2015, tenure and
eligibility for severance pay. ASSD earnings are top-coded.

11. Percentage job separations receiving severance pay

12. Empirical strategy: RDD
I RD Design: compare workers who started job immediately before January
1, 2003 (old system) to those who started on January 1, 2003 or
immediately after (new system).
I Do workers under the old system wait for a layoff? Do workers under the
new system leave earlier? Do they end up in new jobs more quickly?
I Basic sample: Workers who expect to be laid off (i.e. who expect a
negative shock to their firm).
I “Shock” = mass layoff

13. Empirical strategy: RDD
I “Treatment” (= shock to a firm) cannot be directly observed.
Approximated by firms’ employment reduction, which is an outcome.
The way firms (and workers in our sample) are selected might be affected
by the reform.
I Sensitivity analysis: alternative definitions of a mass layoff, alternative
definitions of baseline sample, alternative outcomes. Qualitatively, results
are very robust.
I Use a structural model to check whether a standard DMP model (with
on-the-job search) can replicate job mobility patterns under realistic
parameter values (preliminary).

14. Recuded form estimates:
“Early leavers” before a mass layoff

15. Percentage “early leavers”: Old versus new system
I We look at firms with 30 workers that reduce employment within the
next months by 33 percent or more (“baseline sample”)
I We select workers who
(i) entered 3 - 4 years before the mass layoff
(ii) started their job between Jan 1, 1997 and Dec 31, 2008
(iii) have at least 12 months of tenure in the distressed firm
I Focus on short/medium-tenured workers mitigates endogeneity problems
I Workers with tenure  12 months are mainly fixed-term contracts
I Sample size: 28,099 workers

16. More job separations within 36 months after entry

17. Many more transitions to new jobs (J-J)

18. Somewhat more transitions to unemployment (J-U)

19. RDD analysis
I We estimate regressions of the form
yi = 0 + 1 + 1(xi 0) + 2xi + 31(xi 0)xi + "i
where xi denotes the start date of the job (normalized so that 0
corresponds to the time of the reform) and yi is the outcome variable
under consideration.
I We give more weight to observations close to the cutoff by using a
triangular kernel (Porter, 2003; Hahn et al., 2001)
I Standard errors are clustered at the firm level

20. The reform effect on job mobility, RD estimates

21. How does the effect build up with tenure?

22. RDD validity: Density of new hires, by quarter

23. RDD validity: Percentage co-workers under the new system

24. RDD validity: Are covariates smooth?

25. RDD validity: Placebo reforms

26. ROBUSTNESS: Alternative mass layoff definitions

27. ROBUSTNESS: Matched controls

28. ROBUSTNESS: RDD diff-in-diff, matched controls

29. ROBUSTNESS: By (i) gender, (ii) alternative mass-layoff definition

30. ROBUSTNESS: By (i) mass layoff size, (ii) hiring dates, (iii) firm size before
mass layoff

31. FURTHER RESULTS: Wage growth for job changes
Only job-to-job transitions (fewer observations)
Outcome: Log earnings (new firm) - Log earnings (mass-layoff firm)

32. Summary of reduced form analysis
I Austrian severance-pay reform increased turnover on the labor market
I Substantially higher job mobility of workers expecting a layoff
I Also more transitions to unemployment (misclassification?)
I No effects on worker in non-distressed firms (matched controls)
Effects are robust

33. Structural search and matching model
with on-the-job-search
and severance pay

34. Structural model
I Search and matching model with on-the-job search.
I Firm-worker pairs are subject to stochastic productivity shocks.
I Vacant firms draw initial productivity from the unconditional distribution
and meet unemployed or employed workers with endogenous probability.
I Workers start out ineligible to severance pay and turn eligible with
constant probability ↵.
I Wages are fixed by Nash bargaining.

35. Structural model
I Firms can dissolve matches but have to pay an amount to eligible
workers.
I Employed workers receive outside offers from vacant firms with
endogenous probability f (✓) and decide whether to accept them.
I Exogenous dissolution of matches with probability .
I Extension: temporary jobs

36. Structural model
In equilibrium
I Workers decide whether to accept outside job offers.
I Firms decide whether or not to terminate the employment relationship.
I Firms open vacancies so that the free-entry condition holds.
I The distribution of productivity among firms with eligible and non-eligible
workers is stationary.

37. Effect of flexicurity reform: QUITS
Setting = 0 makes workers more willing to take outside offers

38. Effect of flexicurity refom: LAYOFFS
Setting = 0 has two opposing effects: (i) workers accept lower wages (higher
option value of outside offers); (ii) shorter job durations
Quantitatively, we find negligible effects on reservation productivity

39. Structural model: Estimation
Model is estimated by Simulated Method of Moments.
Targeted moments are
I Monthly exit rate to new jobs
I Monthly exit rate to unemployment
I Macro moments: probability of mass layoff, unemployment rate, labor
market tightness, job-finding rates, hiring cost share.

40. Structural model: Targeted moments

41. Structural model: Fixed parameters

42. Structural model: Estimated parameters

43. Model versus data

44. Model versus data

45. Flexicurity reform: general equilibrium effets
Abolishing severance pay leads to
I 0.6 p.p. reduction in unemployment (from 6.5 to 5.9 percent)
+ 0.7 p.p. due to more job creation
- 0.1 p.p. due to more job destruction
I 1 percent increase in output
I 0.3 percent increase in output per worker

46. Counterfactuals:
Mimicking a Southern European labor market
SCENARIO I: basic model, vary parameters
I Immediate access to severance pay ↵ = 1/3 instead of ↵ = 1/36 (eligible
after 3 instead of 36 months)
I Higher severance pay = 3 monthly earnings (instead of = 2)
I (Wage rigidity)
SCENARIO II: extended model, with temporary jobs

47. Counterfactuals:
Mimicking a Southern European labor market

48. Counterfactual I: Immediate access to severance pay

49. Counterfactual II: Model with temporary jobs

50. Conclusions I
I The Austrian 2003 policy change abolished a severance pay system in
favor of an occupation pension system
I Evaluation using RDD for identification (compare workers by start date
before and after January 1, 2003
I Workers in distressed firms are more likely to move to new jobs
I No effects on workers in non-distressed firms

51. Conclusions II
I Structural search and matching model with on-the-job search
I Model captures job separations and J-J transitions
I Counterfactual policy experiments suggest that both (i) high level of
severance pay and (ii) immediate access reduce job creation and
willingness to accept outside job offers
I Model generates high unemployment equilibrium when severance pay
mandates are generous
(Note: no “positive” role of severance pay in the model)