Determinants of Demands for Severance Payments: An empirical analysis using counter-factual question

To achieve steady economic growth, it is important to maintain the flexibility of labor mobility from ailing industries to growing industries without facing unemployment. For this purpose, the severance payment system has been expected as one of the means in Japan. In this paper, we analyze a dataset from a unique survey which includes counter-factual questions about severance payments; how much the subjects would request in severance payments from their employer if they were unfairly dismissed. We run a number of regressions to examine the determinants of demands for severance payments.

The results show that those with longer lengths of service, higher current incomes, and lower subjective probability of being unemployed tend to ask for larger severance payments. Labor union membership is also one of the determinants of increased requested payments. These results suggest that length of service and current income level will be important criteria to determine the amount of severance payments even in Japan as well as Europe. When introducing a severance payment system in Japan, we should take into account that the effects of seniority on wages in Japan are larger especially for middle-aged and elderly workers. It is desirable for both a payment system to be set up by the government and also opportunities provided to settle labor-management agreements.