Effect of Firing Frictions on Turnover

Abstract

This paper documents a causal relationship between firing costs and turnover at the firm level, by leveraging litigation-generated quasi-experimental variation in firing costs. The causal effect of firing costs on turnover is of the expected negative direction, and of sizable magnitude. This effect is attributed to the effect of litigation risk on regular operations. Exposure to greater litigation risk causes the firm to reduce the riskiness of its normal operations: in particular, employee turnover is ratcheted down to reduce the risk of additional wrongful termination lawsuits. Value added is also shown to decrease in firing costs. Finally, the analysis suggests that trial length need not per se affect turnover or value added.