We construct a firm-specific profit uncertainty index and profit shocks for Swedish firms and their employees (1997-2017) using shrinkage methods on commodity prices. Higher uncertainty decreases the likelihood of firing younger and shorter-tenured workers, while it increases the firing of more skilled workers. Furthermore, it increases the hiring of workers with sector-specific experience. These findings are consistent with a model where heterogeneous workers vary in specialization and flexibility, and uncertainty differently impacts the option value of firing and relocating workers. Our findings emphasize that estimating the effects of uncertainty on the overall level of employment of firms, without considering the different characteristics of these workers, is likely to underestimate the true impact of uncertainty shocks.
