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Labor hoarding and inventories

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  • Yi Wen
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Abstract

Labor hoarding is a widely believed empirical behavior of firms and a prominent explanation for procyclical labor productivity. Conventional wisdom attributes labor hoarding to labor adjustment costs. This paper argues that the conventional wisdom is inadequate for understanding labor hoarding because it ignores the role of inventories. Since idle labor can be used to produce inventories, why do firms hoard labor when inventory is an option? Using a dynamic rational expectations model of profit-maximizing firms facing demand uncertainty, this paper studies the dynamic interactions between labor hoarding and inventory accumulation. Closed-form decision rules for labor and inventory decisions are derived. The analysis shows that labor adjustment costs alone are far from sufficient for explaining labor hoarding. ; Earlier title: On the optimal volume of labor hoarding

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-040.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2005-040

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Keywords: Productivity ; Labor supply;

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  1. Bils, M. & Kahn, J.A., 1996. "What Inventory Behavior Tells Us About Business Cycles," RCER Working Papers 428, University of Rochester - Center for Economic Research (RCER).
  2. Marzio Galeotti & Louis J Maccini & Fabio Schiantarelli, 2002. "Inventories Employment and Hours," Economics Working Paper Archive 473, The Johns Hopkins University,Department of Economics.
  3. Fair, Ray C, 1985. "Excess Labor and the Business Cycle," American Economic Review, American Economic Association, vol. 75(1), pages 239-45, March.
  4. Ben S. Bernanke & Martin L. Parkinson, 1990. "Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries," NBER Working Papers 3503, National Bureau of Economic Research, Inc.
  5. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  6. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  7. Topel, Robert H, 1982. "Inventories, Layoffs, and the Short-Run Demand for Labor," American Economic Review, American Economic Association, vol. 72(4), pages 769-87, September.
  8. Kahn, James A, 1992. "Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 481-510, May.
  9. Alan S. Blinder, 1981. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
  10. Fay, Jon A & Medoff, James L, 1985. "Labor and Output over the Business Cycle: Some Direct Evidence," American Economic Review, American Economic Association, vol. 75(4), pages 638-55, September.
  11. Wen, Yi, 2005. "Understanding the inventory cycle," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1533-1555, November.
  12. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
  13. Maccini, Louis J & Zabel, Edward, 1996. "Serial Correlation in Demand, Backlogging and Production Volatility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 423-52, May.
  14. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-73, April.
  15. Clark, C Scott, 1973. "Labor Hoarding in Durable Goods Industries," American Economic Review, American Economic Association, vol. 63(5), pages 811-24, December.
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Cited by:
  1. Michael J. Dueker, 2006. "Using cyclical regimes of output growth to predict jobless recoveries," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 145-154.

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