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Firing versus Continuing Employment if an Economic Setback is Expected

Author

Listed:
  • Matthias Göcke

    () (University of Giessen)

Abstract

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.

Suggested Citation

  • Matthias Göcke, 2009. "Firing versus Continuing Employment if an Economic Setback is Expected," MAGKS Papers on Economics 200918, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:200918
    as

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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/18-2009_goecke.pdf
    File Function: First version, 2009
    Download Restriction: no

    References listed on IDEAS

    as
    1. Bentolila, S. & Saint-Paul, G., 1995. "A model of labour demand with linear adjustment costs," Labour Economics, Elsevier, pages 105-105.
    2. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
    3. Belke, Ansgar & Gocke, Matthias, 1999. "A Simple Model of Hysteresis in Employment under Exchange Rate Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(3), pages 260-286, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Firing costs and uncertainty; probability; duration and size of recession;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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