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Labor Demand and the Source of Adjustment Costs

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  • Daniel S. Hamermesh

Abstract

Most 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4394.

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Date of creation: Jul 1993
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Publication status: published as Economic Journal, vol. 105, no. 430, pp. 620-634, May 1995
Handle: RePEc:nbr:nberwo:4394

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  1. Nickell, Stephen, 1979. "Unemployment and the structure of labor costs," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 187-222, January.
  2. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  3. Katharine G. Abraham & Susan N. Houseman, 1993. "Job Security and Work Force Adjustment: How Different are U.S. and Japanese Practices?," Book chapters authored by Upjohn Institute researchers, in: Christopher F. Buechtemann (ed.), Employment Security and Labor Market Behavior: Interdisciplinary Approaches and International Evidence, pages 180-199 W.E. Upjohn Institute for Employment Research.
  4. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-44, December.
  5. 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.
  6. Pfann, Gerald A. & Verspagen, Bart, 1989. "The structure of adjustment costs for labour in the Dutch manufacturing sector," Economics Letters, Elsevier, vol. 29(4), pages 365-371.
  7. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  8. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  9. Douglas Holtz-Eakin & Harvey S. Rosen, 1991. "Municipal Labor Demand in the Presence of Uncertainty: An Econometric Approach," NBER Working Papers 3516, National Bureau of Economic Research, Inc.
  10. Nadiri, M Ishaq & Rosen, Sherwin, 1969. "Interrelated Factor Demand Functions," American Economic Review, American Economic Association, vol. 59(4), pages 457-71, Part I Se.
  11. Barron, John M & Bishop, John & Dunkelberg, William C, 1985. "Employer Search: The Interviewing and Hiring of New Employees," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 43-52, February.
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