Labor hoarding and inventories

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Labor hoarding and inventories

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Yi Wen

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Yi Wen

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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(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.)

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. [Downloadable!]

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