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The economics of labor adjustment : mind the gap

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  • Russell Cooper
  • Jonathan L. Willis

Abstract

We study the inferences about labor adjustment costs obtained by the "gap methodology" of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the policy function of a manufacturing plant is assumed to depend on the gap between a target and the current level of employment. Using time series observations, these studies reject the quadratic cost of adjustment model and find that aggregate employment dynamics depend on the cross sectional distribution of employment gaps. We argue that these conclusions may not be justified. Instead these findings may reflect difficulties measuring the gap. Thus it appears that the gap methodology as currently employed, may be unable to: (i) identify the costs of labor adjustment and (ii) assess the aggregate implications of labor adjustment costs.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 01-06.

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Date of creation: 2001
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Handle: RePEc:fip:fedkrw:rwp01-06

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Keywords: Employment (Economic theory);

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  1. Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc.
  2. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
  3. G. Steven Olley & Ariel Pakes, 1992. "The Dynamics of Productivity in the Telecommunications Equipment Industry," NBER Working Papers 3977, National Bureau of Economic Research, Inc.
  4. Daniel S. Hamermesh, 1988. "Labor Demand and the Structure of Adjustment Costs," NBER Working Papers 2572, National Bureau of Economic Research, Inc.
  5. Ricardo J. Caballero & Eduardo M.R.A. Engel & John Haltiwanger, 1995. "Aggregate Employment Dynamics: Building From Microeconomic Evidence," NBER Working Papers 5042, National Bureau of Economic Research, Inc.
  6. Gary D. Hansen, 1989. "Technical Progress and Aggregate Fluctuations," UCLA Economics Working Papers 546, UCLA Department of Economics.
  7. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
  8. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," NBER Working Papers 1899, National Bureau of Economic Research, Inc.
  9. Nickell, S J, 1978. "Fixed Costs, Employment and Labour Demand over the Cycle," Economica, London School of Economics and Political Science, vol. 45(180), pages 329-45, November.
  10. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-44, December.
  11. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
  12. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1992. "Microeconomic Adjustment Hazards and Aggregate Dynamics," NBER Working Papers 4090, National Bureau of Economic Research, Inc.
  13. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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