Dundee Discussion Papers in Economics 095: Hiring and firing: a tale of two thresholds

The negative effect of quits on the willingness of firms to provide on-the-job training is well-documented in the theoretical literature (Becker, 1964). In this paper we explore the strength of this effect by solving a firm’s dynamic optimisation problem where there is uncertainty about future productivity and non-zero firing costs. We find that the degree to which quit rates affect hiring and training depend 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 conclude by highlighting some testable implications of our analysis.