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Review of Economics

Jahrbuch für Wirtschaftswissenschaften

Editor-in-Chief: Berlemann, Michael

Ed. by Haucap, Justus / Thum, Marcel

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Layoffs in a Recession and Temporary Employment Subsidies when a Recovery is Expected

Matthias Göcke
  • University of Gießen, Department of Economics – VWL IV, Licher Str. 62, D-39394 Gießen/Germany, Tel.: (+49)641/99-22241, Fax: (+49)641/99-22249
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Published Online: 2016-02-11 | DOI: https://doi.org/10.1515/roe-2013-0105


Sunk firing and hiring costs shelter existent employment. This effect is typically amplified by uncertainty due to an option value of waiting. Thus, if (i) sunk firing costs are high, for example due to an employment protection legislation or due to the loss of firm-specific human capital, or if (ii) (after a future recovery) recruiting a new qualified staff is difficult and recession-related losses are expected to be only transitory, firms have to consider labour hoarding as a relevant strategy. In this environment a moderate temporary employment subsidy will be sufficient to avoid layoffs by firms currently operating at losses. Depending on the size of sunk (re-)hiring costs, cyclical layoffs or even permanent job destruction can be avoided by short run subsidies during the beginning of a recession.

Keywords: recession; labour hoarding; sunk firing/hiring costs; employment subsidy

About the article

Published Online: 2016-02-11

Published in Print: 2013-04-01

Citation Information: Review of Economics, Volume 64, Issue 1, Pages 73–84, ISSN (Online) 2366-035X, ISSN (Print) 0948-5139, DOI: https://doi.org/10.1515/roe-2013-0105.

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© 2013 by Lucius & Lucius, Stuttgart.

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