DP12112 Job Mobility and Creative Destruction: Flexicurity in the Land of Schumpeter

Author(s): Andreas Kettemann, Francis Kramarz, Josef Zweim├╝ller
Publication Date: June 2017
Keyword(s): creative destruction, flexicurity, job creation, job mobility, Severance pay
JEL(s): J63, J65
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12112

This paper evaluates the 2003 Austrian severance-pay reform, often advocated as a role model for structural reforms in countries plagued by inflexible labor markets and high unemployment. The reform replaced a system with tenure-based severance payments after a layoff (but not after a quit) by payments into pension accounts that accrue to workers after a layoff as well as after a quit. We identify the reform effects using a regression discontinuity (RD) design and find a substantial increase in job mobility in response to the reform. A search-and-matching model with on-the-job search and tenure-dependent severance payments is structurally estimated using the RD induced empirical moments. Counterfactual policy experiments suggest that flexicurity reforms spur job creation and can substantially reduce unemployment in countries where severance payments are initially high.