Effect of Business Uncertainty on Turnover

Abstract

We document a causal relationship between business uncertainty and workforce management at the firm level, by leveraging litigation-generated quasi-experimental variation in business uncertainty. The causal effects of business uncertainty on turnover, hiring and separations are of the expected negative direction, and of sizable magnitude. These consequences are stronger among firms that operate in sectors in which business uncertainty is intrinsically higher, and can be attributed to the effect of regulation induced business risk on normal operations. In particular, employee turnover, hiring and separations are ratcheted down to reduce the risk of additional wrongful termination lawsuits. Value added is also shown to decrease in business risk.