Do separation packages need to be that generous? Simulations for government employees in Guinea-Bissau

Separation packages may be needed to overcome resistance to public sector downsizing, and can be justified on fairness grounds. But what is the right amount of compensation? This paper offers a practical answer to this question, using the case of Guinea-Bissau as an illustration. Building on previous work by Ariel Fiszbein and Ragui Assaad, the paper assumes that a just right package has to offset the loss in earnings and benefits from job separation. Two approaches are used to quantify the loss in benefits. The direct approach explicitly measures the present value of old-age pension, for those workers who end up in the informal sector of the economy. The indirect approach infers the value of benefits from the situation of public sector workers who could apparently earn more out of the public sector than in it, but do not voluntarily leave. The two approaches yield remarkably similar distributions of predicted losses. These distributions are used to compare the performance of four separation packages: three based on usual rules-of-thumb and one tailored to individual characteristics such as gender, education and region of residence. If the goal is to satisfy a majority of the workers, the tailored package outperforms all others.