Paper: Which workers suffer (or benefit) from firm-level uncertainty shocks?

Abstract:
We propose novel evidence on the heterogeneous effects of uncertainty shocks on employment decisions. Using shrinkage methods on commodity prices, we construct a firm-specific profit uncertainty index and profit shocks for the population of Swedish firms (1997-2017) and their employees. We then measure the causal effect of exogenous changes in uncertainty on the employment decisions of firms. When uncertainty increases, firms are less likely to fire younger and short-tenured workers, are more likely to hire workers with previous experience in the same sector and are more likely to both hire and fire more skilled workers, relative to normal times. The results are consistent with the prediction of a model in which heterogeneous workers differ in terms of specialization and flexibility, and in which uncertainty affects differently the option value of firing and relocating these workers. Additional robustness checks confirm this interpretation and highlight the role of disruptive high uncertainty episodes as periods of creative destruction and experimentation for the labour force.