IDEAS home Printed from https://ideas.repec.org/p/mar/magkse/200918.html
   My bibliography  Save this paper

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

    Download full text from publisher

    File URL: https://www.uni-marburg.de/en/fb02/research-groups/economics/macroeconomics/research/magks-joint-discussion-papers-in-economics/papers/2009-papers/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, vol. 2(1), pages 105-105, March.
    2. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 381-402.
    3. Ansgar Belke & Matthias Göcke, 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.
    4. repec:bla:scotjp:v:46:y:1999:i:3:p:260-86 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Claudio Montenegro & Carmen Pagés-Serra, 2003. "¿Quién se beneficia con la normativa de los mercados laborales?: Chile, 1960-1998," Research Department Publications 4346, Inter-American Development Bank, Research Department.
    2. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2000), pages 109-154, August.
    3. Miguel Malo & Joaquín Pérez, 2003. "Individual Dismissals in Europe and the United States: A Model on the Influence of the Legal Framework on Firing Costs," European Journal of Law and Economics, Springer, vol. 15(1), pages 47-63, January.
    4. Claudio Montenegro & Carmen Pagés, 2005. "Who Benefits from Labor Market Regulations? Chile 1960-1998," Central Banking, Analysis, and Economic Policies Book Series, in: Jorge Restrepo & Andrea Tokman R. & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edi (ed.),Labor Markets and Institutions, edition 1, volume 8, chapter 4, pages 077-114, Central Bank of Chile.
    5. Jeon, Haejun & Cui, Xue & Zhang, Chuanqian, 2023. "The effects of labor choice on investment and output dynamics," Journal of Corporate Finance, Elsevier, vol. 83(C).
    6. E. Galdon-Sanchez, Jose & Guell, Maia, 2003. "Dismissal conflicts and unemployment," European Economic Review, Elsevier, vol. 47(2), pages 323-335, April.
    7. Diana Perez-Dacal & Yolanda Pena-Boquete, 2011. "Temporary Employment in Tourism Activities: Regional differences in Spain," ERSA conference papers ersa11p1811, European Regional Science Association.
    8. Camille Signoretto, 2013. "Rupture conventionnelle, destructions d'emplois et licenciements : une analyse empirique sur données d'entreprises (2006-2009)," Documents de travail du Centre d'Economie de la Sorbonne 13069, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    9. Fomba Kamga, Benjamin, 2011. "Labour Contracts and Performance of Cameroonian Firms," IZA Discussion Papers 6211, Institute of Labor Economics (IZA).
    10. Lapatinas, Athanasios, 2009. "Labour adjustment costs: Estimation of a dynamic discrete choice model using panel data for Greek manufacturing firms," Labour Economics, Elsevier, vol. 16(5), pages 521-533, October.
    11. Addison John T. & Teixeira Paulino, 2001. "Employment Adjustment in a “Sclerotic” Labour Market: Comparing Portugal with Germany, Spain, and the United Kingdom / Beschäftigungsanpassung in einem „sklerotischen“ Arbeitsmarkt: Ein Vergleich von ," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 221(4), pages 353-370, August.
    12. Gilles Saint Paul & Samuel Bentolila, 2000. "Will EMU increase eurosclerosis?," Economics Working Papers 449, Department of Economics and Business, Universitat Pompeu Fabra.
    13. Huang, Chun-chieh & Chang, Juin-jen & Lai, Ching-chong, 2009. "Employment effect of dismissal pay in the presence of judicial mistakes," International Review of Law and Economics, Elsevier, vol. 29(1), pages 38-45, March.
    14. John T. Addison & Paulino Teixeira & Jean‐Luc Grosso, 2000. "The Effect of Dismissals Protection on Employment: More on a Vexed Theme," Southern Economic Journal, John Wiley & Sons, vol. 67(1), pages 105-122, July.
    15. Carmen Pagés-Serra & James J. Heckman, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Research Department Publications 4227, Inter-American Development Bank, Research Department.
    16. Benoît Pierre FREYENS, 2010. "Measuring firing costs: The case for direct methods," International Labour Review, International Labour Organization, vol. 149(3), pages 287-313, September.
    17. James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, number heck04-1.
    18. Garibaldi, Pietro, 1998. "Job flow dynamics and firing restrictions," European Economic Review, Elsevier, vol. 42(2), pages 245-275, February.
    19. M. Concepcion Sanz, 1994. "Una estimación de la demanda de trabajo manual y no manual," Investigaciones Economicas, Fundación SEPI, vol. 18(2), pages 333-364, May.
    20. Kramarz, Francis & Michaud, Marie-Laure, 2010. "The shape of hiring and separation costs in France," Labour Economics, Elsevier, vol. 17(1), pages 27-37, January.

    More about this item

    Keywords

    Firing costs and uncertainty; probability; duration and size of recession;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mar:magkse:200918. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bernd Hayo (email available below). General contact details of provider: https://edirc.repec.org/data/vamarde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.