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Lumpy Labor Adjustment as a Propagation Mechanism of Business Cycles

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  • Fang Yao
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Abstract

This paper aims to study the quantitative significance of lumpy labor adjustment as a propagation mechanism for business cycles. In the baseline model, I introduce lumpy job turnover in the spirit of Taylor (1980) and Calvo (1983) in a DSGE framework and find that it performs as same as the quadratic-adjustment-cost model at the aggregate level, but different at firm’s level. In particular, It can capture lumpy labor adjustment at plant’s level through the ’front-loading effect’. Then I implement the Weibull distribution in the same framework to incorporate the increasing hazards of the labor adjustment process, which is supported by the evidence from micro data. This extension represents a substantial improvement over benchmark models. It can replicate high volatility of employment, low volatile labor productivity and persistent dynamics in output. Based on these results, I conclude that intratemporal substitution between the two production factors and the aggregation mechanism play an important role in the propagation mechanism.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-022.

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Length: 40 pages
Date of creation: Feb 2008
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Handle: RePEc:hum:wpaper:sfb649dp2008-022

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Keywords: Business cycles; Lumpy labor adjustment; Weibull distribution; Increasing hazard function;

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Cited by:
  1. Fahr, Stephan & Yao, Fang, 2009. "When does lumpy factor adjustment matter for aggregate dynamics?," Working Paper Series 1016, European Central Bank.

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