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The cost of labor adjustment : inferences from the gap

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Author Info
Russell Cooper
Jonathan Willis

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Abstract

We study labor adjustment costs. We specify a dynamic optimization problem at the plant-level, allowing for both convex and non-convex adjustment costs. We estimate the parameters of the adjustment process using an indirect inference procedure in which simulated moments are matched with data moments. For this study we use estimates of reduced form adjustment functions obtained by the "gap methodology" reported in Caballero and Engel (1993). Contrary to evidence at the micro level in support of non-convex adjustment costs, our preliminary findings indicate that piecewise quadratic adjustment costs are sufficient to match these aggregate moments.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 02-11.

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Date of creation: 2002
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Handle: RePEc:fip:fedkrw:rwp02-11

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Related research
Keywords: Labor market ; Employment (Economic theory);

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  1. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-37, March. [Downloadable!] (restricted)
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  2. Russell Cooper & John Haltiwanger & Jonathan L. Willis, 2003. "Dynamics of labor demand : evidence from plant-level observations and aggregate implications," Research Working Paper RWP 03-12, Federal Reserve Bank of Kansas City. [Downloadable!]
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  3. Caballero, Ricardo J & Engel, Eduardo M R A, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 359-83, May. [Downloadable!] (restricted)
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  4. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September. [Downloadable!] (restricted)
  5. Russell Cooper & Jonathan L. Willis, 2001. "The economics of labor adjustment : mind the gap," Research Working Paper RWP 01-06, Federal Reserve Bank of Kansas City. [Downloadable!]
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  6. Pfann, Gerard A & Palm, Franz C, 1993. "Asymmetric Adjustment Costs in Non-linear Labour Demand Models for the Netherlands and U.K. Manufacturing Sectors," Review of Economic Studies, Blackwell Publishing, vol. 60(2), pages 397-412, April. [Downloadable!] (restricted)
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  7. Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August. [Downloadable!] (restricted)
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  8. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
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  10. Russell Cooper & John Haltiwanger & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September. [Downloadable!] (restricted)
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  11. Hamermesh, Daniel S, 1989. "Labor Demand and the Structure of Adjustment Costs," American Economic Review, American Economic Association, vol. 79(4), pages 674-89, September. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Muto, Ichiro, 2007. "Estimating a New Keynesian Phillips Curve with a Corrected Measure of Real Marginal Cost: Evidence in Japan," MPRA Paper 4662, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Rudolfs Bems & Kristian Jönsson Hartelius, 2006. "Trade Deficits in the Baltic States: How Long Will the Party Last?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 179-209, January. [Downloadable!] (restricted)
    Other versions:
  3. Amil Petrin & Jagadeesh Sivadasan, 2006. "Job Security Does Affect Economic Efficiency: Theory, A New Statistic, and Evidence from Chile," NBER Working Papers 12757, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Zuzana Janko, 2008. "Nominal Wage Contracts, Labor Adjustment Costs and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 434-448, April. [Downloadable!] (restricted)
  5. Christian Bayer, 2004. "On the Interaction of Financial Frictions and Fixed Capital Adjustment Costs: Evidence from a Panel of German Firms," Macroeconomics 0410006, EconWPA. [Downloadable!]
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  6. Christian Bayer, 2004. "Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections," Macroeconomics 0411018, EconWPA. [Downloadable!]
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  7. Christian Bayer, 2004. "A closer look at the gap. A comment on Cooper and Willis' 'mind the gap' paper," Macroeconomics 0408010, EconWPA. [Downloadable!]
  8. Tommy Sveen & Lutz Weinke, 2007. "Inflation Dynamics and Labor Market Dynamics Revisited," Kiel Working Papers 1368, Kiel Institute for the World Economy. [Downloadable!]
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