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Hiring and Firing: A Tale of Two Thresholds

  • Alison L. Booth

    (University of Essex)

  • Yu-Fu Chen

    (University of Dundee)

  • Gylfi Zoega

    (Birkbeck College, University of Iceland)

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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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. 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.
  2. 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.
  3. Booth, Alison L & Zoega, Gylfi, 1999. "Do Quits Cause Under-Training?," Oxford Economic Papers, Oxford University Press, vol. 51(2), pages 374-86, April.
  4. Kuhn, Peter, 1992. "Mandatory Notice," Journal of Labor Economics, University of Chicago Press, vol. 10(2), pages 117-37, April.
  5. 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.
  6. 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.
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