Does Uncertainty of Firing Costs Reduce Hirings?

This paper examines hiring decision under uncertainty of firing costs. We extend the labor demand problem of the firm to account for a random shock that hits the firing cost function. We also consider recursive preferences for the employer in order to separate risk aversion from intertemporal substitution. We find that a rise of the variance of the shock decreases hiring investment if and only if the intertemporal elasticity of substitution is greater than one. The risk aversion parameter does not determine the sign of the uncertainty effect but only its magnitude. [ABSTRACT FROM AUTHOR]

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