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.
