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Frictions and the Joint Behavior of Hiring and Investment

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  • Yashiv, Eran

    ()
    (Tel Aviv University)

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    Abstract

    The decisions of firms on investment and hiring play a crucial role in business cycle fluctuations. This paper explores their dynamic behavior in the presence of frictions. It does so within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using estimation of aggregate, private sector U.S. data, it shows that the model with frictions is able to fit the data. A key element is the interaction of hiring and investment costs. It is significant and negatively signed, implying complementarity between investment and hiring. There is a substantial role for aggregate labor market conditions in hiring costs, whereby the latter are lower in "good times." The fit of the investment part of the model is poor if hiring is left out completely or is introduced without the interaction between the two. The results capture the not so-well known fact whereby there is negative co-movement of gross investment and gross hiring, the former being pro-cyclical while the latter is counter-cyclical. This is so as they follow the cyclical behavior of their respective present values. The relevant intertemporal considerations are highlighted. An asset-pricing type empirical analysis of the estimation results indicates that the hiring rate depends mostly on future labor profitability while the investment rate depends mostly on future returns.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6636.

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    Length: 76 pages
    Date of creation: Jun 2012
    Date of revision:
    Handle: RePEc:iza:izadps:dp6636

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    Related research

    Keywords: gross investment; gross hiring; frictions; business cycles; present values of hiring and investment; forward-looking behavior; production-based asset pricing; complementarities; labor market conditions;

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    References

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    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.:
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    1. Monika Merz & Eran Yashiv, 2005. "Labor and the market value of the firm," LSE Research Online Documents on Economics 19891, London School of Economics and Political Science, LSE Library.
    2. Xiaoji Lin & Santiago Bazdrech & Frederico Belo, 2009. "Labor Hiring, Investment and Stock Return Predictability in the Cross Section," FMG Discussion Papers dp628, Financial Markets Group.
    3. Jordi Galí & Thijs van Rens, 2014. "The Vanishing Procyclicality of Labor Productivity," Working Papers 489, Barcelona Graduate School of Economics.
    4. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
    5. Julia K. Thomas & Aubhik Khan, 2004. "Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics," 2004 Meeting Papers 455, Society for Economic Dynamics.
    6. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, vol. 109(3), pages 175-178, December.
    7. Russell Cooper & John Haltiwanger & Jonathan L. Willis, 2010. "Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application," Economics Working Papers ECO2010/21, European University Institute.
    8. Ralph S.J. Koijen & Stijn Van Nieuwerburgh, 2011. "Predictability of Returns and Cash Flows," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 467-491, December.
    9. Xiaoji Lin & Jack Favilukis, 2011. "Micro Frictions, Asset Pricing, and Aggregate Implications," 2011 Meeting Papers 466, Society for Economic Dynamics.
    10. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
    11. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
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