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Labor Demand and the Structure of Adjustment Costs

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  • Hamermesh, Daniel S

Abstract

This study examines the costs firms face in adjusting labor demand to exogenous shocks. Evidence on monthly plant-level data shows that adjustment proceeds in jumps: employment is unchanged in response to small shocks, but moves instantaneously to a new equilibrium if the shocks are large. Results in the large literature that assumes smooth adjustment are due to aggregation of this nonlinear relation. The finding has implications for cyclical changes in productivity; for severance pay, layoff, and plant-closing restrictions; and for all other policies that affect the cost of adjusting employment. Copyright 1989 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 79 (1989)
Issue (Month): 4 (September)
Pages: 674-89

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Handle: RePEc:aea:aecrev:v:79:y:1989:i:4:p:674-89

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  1. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report 27, Federal Reserve Bank of Minneapolis.
  2. Burgess, Simon M, 1988. "Employment Adjustment in UK Manufacturing," Economic Journal, Royal Economic Society, vol. 98(389), pages 81-103, March.
  3. Barro, Robert J, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 39(1), pages 17-26, January.
  4. Trivedi, Pravin K, 1985. "Distributed Lags, Aggregation, and Compounding: Some Econometric Implications," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 19-35, January.
  5. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
  6. Hamermesh, Daniel S., 1987. "The demand for labor in the long run," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 8, pages 429-471 Elsevier.
  7. Robert J. Gordon, 1980. "The "End-of-Expansion" Phenomenon in Short-run Productivity Behavior," NBER Working Papers 0427, National Bureau of Economic Research, Inc.
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