Labor Demand and the Source of Adjustment Costs
AbstractMost models of dynamic labor demand are written in terms of costs of adjusting employment (net adjustment costs). A few are based on the costs of hiring and firing (gross adjustment costs). This study derives several models containing both types of adjustment costs. A dynamic-programming model with quadratic adjustment costs generates an estimate of the lower bound on the fraction of adjustment costs that are gross costs. A model with lumpy costs of adjustment also estimates the relative sizes of the two types of costs. The models are estimated over two sets of short monthly time series obtained from private sources, one from a medium-size hospital, the other describing three plants operated by a small manufacturing firm, The quadratic-cost model is also estimated using data describing small industries. The estimates demonstrate that the importance of the two types of costs differs across establishments, though gross adjustment costs appear relatively larger. The results provide evidence on issues of asymmetry in business cycles and the role of human capital in generating externalities in economic growth.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4394.
Date of creation: Jul 1993
Date of revision:
Publication status: published as Economic Journal, vol. 105, no. 430, pp. 620-634, May 1995
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Find related papers by JEL classification:
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
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