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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Bibliographic Details
Published in:MAGKS - Joint Discussion Paper Series in Economics (Band 18-2009)
Main Author: Göcke, Matthias
Format: Work
Language:English
Published: Philipps-Universität Marburg 2009
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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.
ISSN:1867-3678
DOI:10.17192/es2023.0232