Asymmetric Adjustment Costs in Non-linear Labour Demand Models for the Netherlands and U.K. Manufacturing Sectors

The costs of hiring a worker generally differ in size from the firing costs. This article investigates optimal labour demand schedules for production and non-production workers of firms that operate under uncertainty and face asymmetric costs of adjusting their workforce. In the empirical part generalised methods of moments (GMM) estimates of the structural parameters of the Euler conditions for production and non-production workers are presented, together with specification and structural stability tests, using time series data of the Netherlands and U.K. manufacturing sectors. We find that asymmetric adjustment costs play an important role in the explanation of unbalanced labour demand between upward and downward movements of the business cycle. Moreover, hiring costs exceed firing costs of production workers, whereas firing costs exceed hiring costs of non-production workers.