Labor Demand and the Structure of Adjustment Costs
AbstractThis study examines the nature of the costs that firms face in adjusting labor demand in response to shocks induced by changes in output demand and prices. Empirical work on monthly plant-level time-series data shows that adjustment proceeds in jumps. Employment is unchanged in response to small demand shocks, but moves instantaneously to a new long-run equilibrium if the shocks are large. Results in the large literature that assumes smooth adjustment are due to aggregation of this inherently nonlinear relation over subunits experiencing different shocks. The finding has implications for cyclical changes in productivity and for examining the effects of policies such as severance pay, layoff and plant-closing restrictions, and mandatory listing of job vacancies, all of which change the cost of adjusting employment.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2572.
Date of creation: May 1988
Date of revision:
Publication status: published as American Economic Review, vol. 79, no.4, September 1989, pp. 674-689.
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
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Other versions of this item:
- Hamermesh, Daniel S, 1989. "Labor Demand and the Structure of Adjustment Costs," American Economic Review, American Economic Association, vol. 79(4), pages 674-89, September.
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