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Plant Closings, Labor Demand and the Value of the Firm

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  • Daniel S. Hamermesh

Abstract

This study postulates an internal labor market in which workers accumulate firm-specific human capital that raises the value of the firm and insulates it to some extent from the vagaries of product demand that might result in its closing. Negative product-market shocks reduce wage growth and increase the probability of the firm closing. The model also predicts a U-shaped relation between the probability of the plant closing and the length of a worker's tenure, a proxy for firm-specific human investment. PSID data for 1977 through 1981 are used to produce weighted-probit estimates of the parameters of an equation describing the probability of displacement. The results support most of the predictions of the model, but similarly specified equations describing the probability of permanent layoff indicate that a theory of plant closings must differ from that of layoffs. The parameter estimates are used to infer an analogue to the firm's elasticity of demand for labor and to deduce the wage reduction necessary to avoid an increase in the probability of a plant closing when a negative demand shock occurs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1839.

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Date of creation: Feb 1989
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Handle: RePEc:nbr:nberwo:1839

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  1. Jacob Mincer & Boyan Jovanovic, 1982. "Labor Mobility and Wages," NBER Working Papers 0357, National Bureau of Economic Research, Inc.
  2. Colin Lawrence & Robert Z. Lawrence, 1985. "Manufacturing Wage Dispersion: An End Game Interpretation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 47-116.
  3. Blau, Francine D & Kahn, Lawrence M, 1981. "Causes and Consequences of Layoffs," Economic Inquiry, Western Economic Association International, vol. 19(2), pages 270-96, April.
  4. Katharine G. Abraham & James L. Medoff, 1984. "Length of service and layoffs in union and nonunion work groups," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 38(1), pages 87-97, October.
  5. Daniel J. B. Mitchell, 1982. "Recent Union Contract Concessions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 165-204.
  6. Brown, Charles, 1980. "Equalizing Differences in the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 94(1), pages 113-34, February.
  7. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
  8. Hamermesh, Daniel S, 1987. "The Costs of Worker Displacement," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 51-75, February.
  9. Raisian, John, 1983. "Contracts, Job Experience, and Cyclical Labor Market Adjustments," Journal of Labor Economics, University of Chicago Press, vol. 1(2), pages 152-70, April.
  10. Martin Feldstein & James M. Poterba, 1984. "Unemployment Insurance and Reservation Wages," NBER Working Papers 1011, National Bureau of Economic Research, Inc.
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