Surveys have shown that many employers offer severance packages to their laid-off workers and that severance pay provides substantial income for many people displaced from long-time jobs. Yet little, if anything, is known about the effects of severance pay. Does it lead people to alter the intensity of their job search or their decisions to take advantage of retraining opportunities? Does it enable them to hold out for better-paying jobs?

The author forges new ground with this study by combining information from an administrative data base on displaced workers from Massachusetts that includes the names of their previous employers with severance plan summaries obtained from a subset of these employers. She finds that severance recipients in Massachusetts returned to work more slowly than nonrecipients in the early 1990s, even after adjusting for other factors such as local unemployment rates and demographic characteristics that may have played an independent role. Severance benefits had some positive impact on enrollments in remedial and basic education programs but no consequences for reemployment pay.