European Labour Law and Severance Pay Determination in Collective Redundancies

In this article, we analyse the effects of institutional procedures for redundancies on the earning losses of redundant workers in Europe. Our approach consists of modelling an ideal case embedding the main characteristics of European Labour Law, in particular, the bargaining between firms and workers on the severance pay after a negative shock. The most striking result is that an exact compensation of the earning losses is only obtained by chance. In particular, we show (including a numerical example) that overcompensation of dismissed workers is a real possibility. On the contrary, the ex-ante bargaining models of severance pay predict a full-insurance result. Therefore, we propose a policy recommendation which consists of changing the ex-post bargaining of severance pay in collective dismissals for an ex-ante bargaining.