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Turnover and the Dynamics of Labor Demand

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  • Daniel S. Hamermesh
  • Gerard Pfann

Abstract

The theory of the dynamics of labor demand is based either on the costs of adjusting the level of employment or on the costs of hiring or firing (of gross changes in employment). We write down a generalized cost of adjustment function that includes both types of cost and allows for asymmetries in those costs. We derive the firm's rational-expectations profit - maximizing path of employment demand and the Euler equation whose parameters we estimate. Identifying the two types of costs requires complete data on turnover, which were available for the U.S. through 1981. We use these data for manufacturing to demonstrate that both types of adjustment cost figure in the representative firm's profit-maximizing decisions about employment, and that both types of cost are asymmetric (leading here to quicker increases than decreases in employment).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4204.

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Date of creation: Oct 1992
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Publication status: published as Economica, Vol.63, No.3, pp.359-367, August 1996.
Handle: RePEc:nbr:nberwo:4204

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  1. Steve J. Davis & John Haltiwanger, 1991. "Gross job creation, gross job destruction and employment reallocation," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 91-5, Federal Reserve Bank of Chicago.
  2. Burgess, S M, 1992. "Nonlinear Dynamics in a Structural Model of Employment," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(S), pages S101-18, Suppl. De.
  3. Abraham, Katharine G. & Houseman, Susan N., 1989. "Job security and work force adjustment: How different are U.S. and Japanese practices?," Journal of the Japanese and International Economies, Elsevier, vol. 3(4), pages 500-521, December.
  4. PFANN, Gerard & PALM, Franz, 1992. "Asymmetric adjustment costs in non-linear labour demand models for the Netherlands and UK manufacturing sectors," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1992017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Shapiro, Matthew D, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(3), pages 513-42, August.
  6. Ours, J. C. van & Pfann, G. & Ridder, G., 1993. "Labour Demand and Equilibrium Wage Formation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-153299, Tilburg University.
  7. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, Econometric Society, vol. 51(1), pages 153-74, January.
  8. McLaughlin, Kenneth J, 1991. "A Theory of Quits and Layoffs with Efficient Turnover," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(1), pages 1-29, February.
  9. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  10. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
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