Matching severance payments with worker losses in the Egyptian public sector

Severance pay programs can reduce political opposition and minimize the social costs of labor redundancies. In Egypt, only voluntary programs are feasible because legal limitations preclude layoffs and strong organized labor groups oppose any weakening of job security protections. A common problem with voluntary severance programs, however, is that they tend to overpay workers relative to the welfare losses they experience from displacement. This article estimates the losses that public sector workers would incur if they were displaced from their jobs and simulates several voluntary severance schemes to determine how well the schemes match compensation payments to these estimated losses. It provides a fairly strong argument for looking at the structure of opportunity costs and wage profiles when designing severance programs. It shows that significant overpayment can be avoided by matching compensation payments to the expected losses of workers. It also provides a method for estimating these losses from standard labor force surveys that are available in most countries.