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Firing versus Continuing Employment if an Economic Setback is Expected
A simple model evaluating a firm’s optimal employment reaction to an imminent recession is presented. Firing costs shelter employment – and this effect is typically amplified by uncertainty due to an option value of waiting. However, this job protection effect is reduced if the expected probability...
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| Published in: | MAGKS - Joint Discussion Paper Series in Economics (Band 18-2009) |
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| Main Author: | |
| Format: | Work |
| Language: | English |
| Published: |
2009
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| Subjects: | |
| Online Access: | PDF Full Text |
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| Summary: | A simple model evaluating a firm’s optimal employment reaction to an imminent recession is presented. Firing costs shelter employment – and this effect is typically amplified by uncertainty due to an option value of waiting. However, this job protection effect is reduced if the expected probability of a setback increases, and if the expected duration and size of a recession grows. If a severe recession is expected with a high probability the option to wait with firing looses its value, thus, immediate layoffs and market exits become the optimal strategy even before the recession turns out to be actual. |
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| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2023.0232 |