THE INTENSIVE MARGIN PUZZLE AND LABOR MARKET ADJUSTMENT COSTS

This paper documents a puzzling fact, namely that there is a significant negative relation between employment protection legislation and the usage of the intensive margin of labor market adjustments. I make use of a real business cycle model and introduce search and matching frictions as well as adj...

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Bibliographic Details
Published in:Macroeconomic dynamics 2016-09, Vol.20 (6), p.1458-1476
Main Author: Wesselbaum, Dennis
Format: Article
Language:English
Subjects:
Business cycles
Costs
Economic theory
Employment
Labor market
Macroeconomics
Regression analysis
Studies
Time series
Volatility
Workers
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Summary:This paper documents a puzzling fact, namely that there is a significant negative relation between employment protection legislation and the usage of the intensive margin of labor market adjustments. I make use of a real business cycle model and introduce search and matching frictions as well as adjustment costs along the extensive and the intensive labor market margins. I show that the model is able to replicate the observed patterns of cyclicality, volatility, and especially the behavior of extensive and intensive margins if we assume low firing costs and relatively high hours adjustment costs.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100514000984