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Labor Demand and the Structure of Adjustment Costs

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  • Daniel S. Hamermesh

Abstract

This 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2572.

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Date of creation: May 1988
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Publication status: published as American Economic Review, vol. 79, no.4, September 1989, pp. 674-689.
Handle: RePEc:nbr:nberwo:2572

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  1. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report 27, Federal Reserve Bank of Minneapolis.
  2. Barro, Robert J, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 39(1), pages 17-26, January.
  3. Hamermesh, Daniel S., 1987. "The demand for labor in the long run," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 8, pages 429-471 Elsevier.
  4. Robert J. Gordon, 1980. "The "End-of-Expansion" Phenomenon in Short-run Productivity Behavior," NBER Working Papers 0427, National Bureau of Economic Research, Inc.
  5. Trivedi, Pravin K, 1985. "Distributed Lags, Aggregation, and Compounding: Some Econometric Implications," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 19-35, January.
  6. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
  7. Burgess, Simon M, 1988. "Employment Adjustment in UK Manufacturing," Economic Journal, Royal Economic Society, vol. 98(389), pages 81-103, March.
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