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, FlorenceNovember 16, 2017

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.

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 Europeancountries (see OECD 2006, OECD 2017, EU Commission Green Paper2006)

I Abolishing high firing costs (typically large severance payments) mayincrease labor mobility, reduce labor market segmentation andunemployment.

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 salariesI 20 to 24.9 years tenure: 9 monthly salariesI 15 to 19.9 years tenure: 6 monthly salariesI 10 to 14.9 years tenure: 4 monthly salariesI 5 to 9.9 years tenure: 3 monthly salariesI 3 to 4.9 years tenure: 2 monthly salariesI 0 to 2.9 years tenure: not eligible

The NEW system: Occupational pensions (OP)

I New labor contracts – job starting on January 1, 2003 or later – weresubject 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 QUITI worker still owns the account and transfers it to new employerI can withdraw a limited amount from the account.

I MAJOR CHANGE IN INCENTIVESDisincentive to quit is abolished under the new system – for workers with ahigh layoff probability.

Severance-pay vs occupational-pension schedules

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3 5 10 15 20 25 30Tenure  (Years)

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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 literatureI Firing costs and job durations: Garibaldi and Pacelli (2008), ...I Other papers exploiting Austrian severance pay rules

ICard, Chetty and Weber (2007): liqudity and unemployment duration

IManoli and Weber (2016): timing of retirement

I Theoretical work on severance payI Bentolila, Bertola (1990), Pissarides (1990), Lazear (1990), ...,

Postel-Vinay, Turon (2014), Parsons (2014), Boeri, Garibaldi, Moen (2015)

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 increasesproductivity

I allows counterfactual policy experiments (Southern Europe)

DATA

EMPIRICAL STRATEGY

Data

I Austrian social security data (ASSD) and tax records (ATD, Austrian taxrecords); linked via anonymized social security ID.

I ATD covers all tax files (except public servants) over the period1994-2012. Has information on actual severance payment (which aresubject 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 andeligibility for severance pay. ASSD earnings are top-coded.

Percentage job separations receiving severance pay

Empirical strategy: RDD

I RD Design: compare workers who started job immediately before January1, 2003 (old system) to those who started on January 1, 2003 orimmediately after (new system).

I Do workers under the old system wait for a layoff? Do workers under thenew 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 anegative shock to their firm).

I “Shock” = mass layoff

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 affectedby the reform.

I Sensitivity analysis: alternative definitions of a mass layoff, alternativedefinitions of baseline sample, alternative outcomes. Qualitatively, resultsare very robust.

I Use a structural model to check whether a standard DMP model (withon-the-job search) can replicate job mobility patterns under realisticparameter values (preliminary).

Recuded form estimates:

“Early leavers” before a mass layoff

Percentage “early leavers”: Old versus new system

I We look at firms with � 30 workers that reduce employment within thenext 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 firmI Focus on short/medium-tenured workers mitigates endogeneity problemsI Workers with tenure 12 months are mainly fixed-term contracts

I Sample size: 28,099 workers

More job separations within 36 months after entry

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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 0corresponds to the time of the reform) and yi is the outcome variableunder consideration.

I We give more weight to observations close to the cutoff by using atriangular kernel (Porter, 2003; Hahn et al., 2001)

I Standard errors are clustered at the firm level

The reform effect on job mobility, RD estimates

How does the effect build up with tenure?

RDD validity: Density of new hires, by quarter

RDD validity: Percentage co-workers under the new system

RDD validity: Are covariates smooth?

RDD validity: Placebo reforms

ROBUSTNESS: Alternative mass layoff definitions

ROBUSTNESS: Matched controls

ROBUSTNESS: RDD diff-in-diff, matched controls

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

ROBUSTNESS: By (i) mass layoff size, (ii) hiring dates, (iii) firm size beforemass layoff

FURTHER RESULTS: Wage growth for job changes

Only job-to-job transitions (fewer observations)Outcome: Log earnings (new firm) - Log earnings (mass-layoff firm)

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

Structural search and matching model

with on-the-job-search

and severance pay

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 distributionand meet unemployed or employed workers with endogenous probability.

I Workers start out ineligible to severance pay and turn eligible withconstant probability ↵.

I Wages are fixed by Nash bargaining.

Structural model

I Firms can dissolve matches but have to pay an amount to eligibleworkers.

I Employed workers receive outside offers from vacant firms withendogenous probability �f (✓) and decide whether to accept them.

I Exogenous dissolution of matches with probability �.

I Extension: temporary jobs

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-eligibleworkers is stationary.

Effect of flexicurity reform: QUITS

Setting = 0 makes workers more willing to take outside offers

Effect of flexicurity refom: LAYOFFSSetting = 0 has two opposing effects: (i) workers accept lower wages (higheroption value of outside offers); (ii) shorter job durations

Quantitatively, we find negligible effects on reservation productivity

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, labormarket tightness, job-finding rates, hiring cost share.

Structural model: Targeted moments

Structural model: Fixed parameters

Structural model: Estimated parameters

Model versus data

Model versus data

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

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 (eligibleafter 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

Counterfactuals:Mimicking a Southern European labor market

Counterfactual I: Immediate access to severance pay

Counterfactual II: Model with temporary jobs

Conclusions I

I The Austrian 2003 policy change abolished a severance pay system infavor of an occupation pension system

I Evaluation using RDD for identification (compare workers by start datebefore 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

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 ofseverance pay and (ii) immediate access reduce job creation andwillingness to accept outside job offers

I Model generates high unemployment equilibrium when severance paymandates are generous

(Note: no “positive” role of severance pay in the model)