Sunday, July 29, 2007

Severance Insurance

Days or weeks? The classic answer is probably, "It depends." But depends on what? My guess is that since severance benefits are typically determined by the length of tenure an employee has, average employee tenure is probably one of the biggest factors. I'd expect that an old line company like P&G or IBM or ATT probably has pretty long average employee tenures, so their displaced employees probably receive a severance benefit that provides a big spread (arbitrage) between benefit duration and how long it takes their displaced employee to find a new job.

As an example the Bureau of Labor Statistics data for the month of June states that the median weeks unemployed for US workers over the age of 16 is 6.2 weeks. So, if the average benefit formula provides one week of benefit for every year of tenure, then there exists a positive potential arbitrage for every worker who has been employed by the same company for over 6.2 years. This leads to the question of what is the average tenure of the American workforce?


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