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Hiring and Firing: A Tale of Two Thresholds

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  • Alison L. Booth

    (University of Essex)

  • Yu-Fu Chen

    (University of Dundee)

  • Gylfi Zoega

    (Birkbeck College, University of Iceland)

Abstract

The negative effect of quits on the willingness of firms to provide on-the-job training is well documented in the theoretical literature. Here we explore the strength of this effect by solving a firm's dynamic optimization problem where there is uncertainty about future productivity and nonzero firing costs. We find that the degree to which quit rates affect hiring depends on the ratio of firing to hiring costs. As this ratio rises, the negative effect of quits becomes less important, eventually reversing itself. We also describe how quit rates affect the firing decision. We highlight some testable implications of our analysis.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 20 (2002)
Issue (Month): 2 (Part)
Pages: 217-248

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Handle: RePEc:ucp:jlabec:v:20:y:2002:i:2:p:217-248

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  1. Addison, John T & Chilton, John B, 1997. "Nondisclosure as a Contract Remedy: Explaining the Advance-Notice Puzzle," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 143-64, January.
  2. Booth, Alison & Chatterji, Monojit, 1989. "Redundancy Payments and Firm-Specific Training," Economica, London School of Economics and Political Science, vol. 56(224), pages 505-21, November.
  3. Royalty, Anne Beeson, 1998. "Job-to-Job and Job-to-Nonemployment Turnover by Gender and Education Level," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 392-443, April.
  4. Stevens, Margaret, 1994. "A Theoretical Model of On-the-Job Training with Imperfect Competition," Oxford Economic Papers, Oxford University Press, vol. 46(4), pages 537-62, October.
  5. Kuhn, Peter, 1992. "Mandatory Notice," Journal of Labor Economics, University of Chicago Press, vol. 10(2), pages 117-37, April.
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Cited by:
  1. Booth, Alison L. & Zoega, Gylfi, 2003. "On the welfare implications of firing costs," European Journal of Political Economy, Elsevier, vol. 19(4), pages 759-775, November.
  2. Yu-Fu Chen & Michael Funke, 2002. "Exchange Rate Uncertainty and Labour Market Adjustment under Fixed and Flexible Exchange Rates," CESifo Working Paper Series 779, CESifo Group Munich.
  3. Elisabetta Magnani, 2012. "Older Workers' Training Opportunities in Times of Workplace Innovation," Working Papers 201205, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  4. Yu-Fu Chen & Michael Funke, 2004. "Working Time and Employment under Uncertainty," Quantitative Macroeconomics Working Papers 20409, Hamburg University, Department of Economics.
  5. Jim Malley & Hassan Molana, 2007. "The Relationship between Output and Unemployment with Efficiency Wages," German Economic Review, Verein für Socialpolitik, vol. 8, pages 561-577, November.
  6. B. Dormont & M. Pauchet, 2003. "Uncertainty and Recourse to Short-Term Contracts," THEMA Working Papers 2003-35, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  7. Månsson, Jonas, 2006. "A Note on the Shape of the Cost Function for Recruiting Labour," CAFO Working Papers 2006:4, Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University.
  8. Yu-Fu Chen & I-Hui Cheng, 2003. "Lobbying for Protection under Uncertainty: A Real Option Approach," Dundee Discussion Papers in Economics 155, Economic Studies, University of Dundee.
  9. Yu-Fu Chen & Michael Funke, 2003. "Exchange Rate Uncertainty and Labour Market Flexibility under Fixed and Flexible Exchange Rates," Dundee Discussion Papers in Economics 149, Economic Studies, University of Dundee.
  10. World Bank, 2005. "Malaysia : Firm Competitiveness, Investment Climate and Growth," World Bank Other Operational Studies 8310, The World Bank.

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