I analyze how hiring and firing costs as well as firing delay effects a firm;;s labor marketdemand with a stochastic control model. These frictions are substantial in practice. Imodel also ;;firm-sized;; firing and hiring costs that are proportional to the number ofemployees. Examples of these costs are some regulations that applies only to largerfirms. My model gives the optimal employment policy for a firm to maximize itsexpected discounted cash flows. I first derive analytical solutions for the value of thecompany as a function of the fraction of labor to demand and then solve numericallyfor the parameters of the value functions. I also show that the solution to the firm;;sproblem exists, and is unique. I develop a numerical algorithm that finds the optimalpolicy.The firing delay encourages firms to fire earlier. The firing delay also causes fewerworkers to be fired. Firm-sized firing cost postpones a firm;;s firing, but raises thefiring quantity. Similarly, increasing the firm-sized hiring cost reduces the chance ofhiring, but raises the amount hired.I apply the model to Ford Motor Company. It accurately predicts the fall in Ford;;semployment level from 2006 to 2009. My model also accurately estimates Ford;;sgross value. Productivity and wages have the largest impact on Ford;;s equity value,followed by the interest rate, and then the consumer demand parameters. Changing firing frictions has a negligible impact on equity value. Based on the impacts of changing the model parameters, Ford would benefit the most from a one percent increase in the productivity or decrease in wage costs would have the biggest impact for Ford. Small reductions in the delay in shutting down factories or reducing firing costs would not have much of an impact, so Ford could offer raising the delay and severance packages to the union in negotiations, in exchange for wage reductions or productivity increases.
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