The cost of labor adjustment: Inferences from the gap

This paper studies the aggregate implications of micro-level labor adjustment costs. Caballero and Engel [Caballero, R., Engel, E., 1993. Microeconomic adjustment hazards and aggregate dynamics. Quarterly Journal of Economics 108, 313–358] find a dependence of aggregate employment growth on the cros...

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Bibliographic Details
Published in:Review of economic dynamics 2009-10, Vol.12 (4), p.632-647
Main Authors: Cooper, Russell, Willis, Jonathan L.
Format: Article
Language:English
Subjects:
Adjustment costs
Aggregate employment
Costs
Economic models
Employment
Labor market
Labour economics
Labour market structure
Measurement
Optimization
Organizational analysis
Statistical inference
Studies
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Summary:This paper studies the aggregate implications of micro-level labor adjustment costs. Caballero and Engel [Caballero, R., Engel, E., 1993. Microeconomic adjustment hazards and aggregate dynamics. Quarterly Journal of Economics 108, 313–358] find a dependence of aggregate employment growth on the cross sectional distribution of “employment gaps.” This paper uses those results as moments in an indirect inference procedure to infer the underlying labor adjustment costs. We specify a dynamic optimization problem at the plant level, allowing for both convex and non-convex adjustment costs. Consistent with evidence at the micro level, our findings indicate that non-convex adjustment costs are necessary to match these aggregate moments.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2008.12.001