Capital Values, Job Values and the Joint Behavior of Hiring and Investment

The decisions of firms on investment and hiring play a crucial role in business cycle fluctuations. This paper explores their dynamics in the presence of frictions. It does so within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using estimation of aggregate, private sector U.S. data, it shows that the model with frictions is able to fit the data. A key element is the interaction of hiring costs and investment costs, which is significant and negatively signed, implying complementarity between investment and hiring. The estimated costs are of modest size only. Key findings are, inter alia: U.S. labor market developments, including the fall in unemployment and its subsequent rise in the Great Recession, can be accounted for by changes in job values (as well as in labor force growth rates); there is a substantial effect of the expected capital value on hiring; the cyclical behavior of hiring and investment is markedly different, with counter-cyclical hiring rates and job values; and future returns play a dominant role in determining these capital values and job values.