Central Data Catalog

Citation Information

Type Journal Article
Title Mandatory severance pay in Peru: An assessment of its coverage and effects using panel data
Publication (Day/Month/Year) 2000
URL http://www.lacea.org/meeting2000/MartinRama.PDF
n Peru, like in many other developing countries, employers have the legal obligation to pay severance to workers who are dismissed due to no fault of their own. Is this a cost-effective mechanism to provide income support to the unemployed? This paper seeks an answer to this question using individual records from three rounds of a household panel. Relying on five coverage indicators, the paper shows that roughly 20 percent of private sector workers are legally entitled to severance pay, but only half of those covered are likely to get it in the event of dismissal. Legal coverage, and especially actual coverage, are more prevalent among wealthier workers. Few among the unemployed get severance, which suggests that those covered are less likely to lose their jobs. Combining several empirical strategies, the paper also shows that covered workers do not “pay” for their severance through lower wages, although their wages are not significantly higher either. Finally, consumption among unemployed workers who received severance is 20 to 30 percent higher than among those who did not.

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