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The Joint Behavior of Hiring and Investment

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  • Yashiv, Eran
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    Abstract

    This paper explores the dynamic behavior of investment and hiring within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using structural estimation in aggregate, private sector U.S. data, it shows that the model, which features adjustment costs, is able to fit the data. Unlike many previous results, the fit is achieved without implying high adjustment costs. The interaction of hiring and investment costs is significant and is negatively signed, implying complementarity between investment and hiring. There is a substantial role for labor market conditions in hiring costs, whereby the latter are lower in “good times.” The fit of the investment part of the model is poor if hiring is left out completely or is introduced without the interaction between the two. The results capture the not so-well known fact whereby there is negative co-movement of gross investment and gross hiring, the former being pro-cyclical while the latter is countercylical. This is so as they follow the cyclical behavior of their present values. An asset-pricing type empirical analysis indicates that the hiring rate depends mostly on future labor profitability while the investment rate depends mostly on future returns.

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    Bibliographic Info

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8237.

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    Date of creation: Feb 2011
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    Handle: RePEc:cpr:ceprdp:8237

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    Related research

    Keywords: business cycles; complementarity; forward-looking behavior; gross hiriting; gross investment; labor market conditions; present values of hiring and investment;

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    References

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    1. Merz, Monika & Yashiv, Eran, 2004. "Labour and the Market Value of the Firm," CEPR Discussion Papers 4184, C.E.P.R. Discussion Papers.
    2. Xiaoji Lin & Santiago Bazdrech & Frederico Belo, 2009. "Labor Hiring, Investment and Stock Return Predictability in the Cross Section," FMG Discussion Papers dp628, Financial Markets Group.
    3. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
    4. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, vol. 109(3), pages 175-178, December.
    5. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers 460, Society for Economic Dynamics.
    6. Bond, Stephen & Van Reenen, John, 2007. "Microeconometric Models of Investment and Employment," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 65 Elsevier.
    7. Aubhik Khan & Julia K. Thomas, 2008. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," Econometrica, Econometric Society, vol. 76(2), pages 395-436, 03.
    8. Ralph S.J. Koijen & Stijn Van Nieuwerburgh, 2011. "Predictability of Returns and Cash Flows," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 467-491, December.
    9. Russell Cooper & John Haltiwanger & Jonathan L. Willis, 2010. "Euler-equation estimation for discrete choice models: a capital accumulation application," Research Working Paper RWP 10-04, Federal Reserve Bank of Kansas City.
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