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Aggregate Employment Dynamics: Building From Microeconomic Evidence

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  • Ricardo J. Caballero
  • Eduardo M.R.A. Engel
  • John Haltiwanger

Abstract

This paper studies quarterly employment flows of approximately 10,000 large U.S. manufacturing establishments during 1972:1-1980:4.After estimating the extent of short run microeconomic substitution between employment and hours per worker (hours-week), we construct measures of the path of the deviation between actual and desired employment based on the observed behavior of establishments' hours-week. These deviations are then used as the state variables upon which units decide their employment adjustments (microeconomic policy). Using this framework we find that: (i) Microeconomic employment adjustment policies are non-linear, with firms adjusting to large deviations proportionally more than to small ones; (ii) Employment adjustments are often either large or nil, suggesting the presence of non-convexities in the adjustment cost technologies; (iii) 60 to 90 % of aggregate employment fluctuations is due to changes in the cross sectional distribution of employment deviations, while the rest is due to microeconomic policy changes; (iv) Most of the net aggregate employment fluctuations from changes in the cross sectional distribution are accounted for by aggregate shocks, despite significant fluctuations in the distribution of idiosyncratic shocks and the marked countercyclical nature of their second moment(i.e. reallocation shocks) (v) Similarly, most of the net aggregate employment fluctuations due to microeconomic policy changes are accounted for by aggregate shocks; (vi) Aggregate shocks are also the dominant source of job destruction, but account for less than half of fluctuations in job creation; (vii) A simple parametric version of the aggregate model suggested by the microeconomic nonlinearities shown above has a mean square error 50% lower than its linear counterpart's.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5042.

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Date of creation: Feb 1995
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Publication status: published as American Economic Review, Vol. 87, no. 1 (March 1997): 115-137
Handle: RePEc:nbr:nberwo:5042

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  1. Abraham, Katharine G & Katz, Lawrence F, 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages 507-22, June.
  2. Ricardo J. Caballero, 1991. "A Fallacy of Composition," NBER Working Papers 3735, National Bureau of Economic Research, Inc.
  3. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
  4. 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.
  5. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  6. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1991. "Dynamic (S,s) Economies," NBER Working Papers 3734, National Bureau of Economic Research, Inc.
  7. Eberly, J.C., 1990. "Adjustment of Consumers'durables Stocks: Evidence from Automobile Purchases," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 22-91, Wharton School - Weiss Center for International Financial Research.
  8. Caballero, Ricardo J & Engel, Eduardo M R A, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(2), pages 359-83, May.
  9. Steve J. Davis & John Haltiwanger, 1991. "Gross job creation, gross job destruction and employment reallocation," Working Paper Series, Macroeconomic Issues 91-5, Federal Reserve Bank of Chicago.
  10. Caplin, A. & Leahy, J., 1989. "State-Dependent Pricing And The Dynamics Of Money And Output," Discussion Papers, Columbia University, Department of Economics 1989_32, Columbia University, Department of Economics.
  11. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  12. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," NBER Working Papers 1899, National Bureau of Economic Research, Inc.
  13. 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.
  14. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
  15. Ricardo J. Caballero & Mohamad L. Hammour, 1994. "On the Timing and Efficiency of Creative Destruction," NBER Working Papers 4768, National Bureau of Economic Research, Inc.
  16. Caballero, R.J. & Hammour, M.L., 1991. "The Cleansing Effect of Recessions," Discussion Papers, Columbia University, Department of Economics 1991_59, Columbia University, Department of Economics.
  17. Dale Mortensen & Christopher Pissarides, 1992. "The Cyclical Behavior of Job Creation and Job Destruction," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 982, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 777-93, August.
  19. Mortensen, Dale T., 1994. "The cyclical behavior of job and worker flows," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1121-1142, November.
  20. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report, Federal Reserve Bank of Minneapolis 27, Federal Reserve Bank of Minneapolis.
  21. repec:fth:coluec:465 is not listed on IDEAS
  22. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1395-1409, November.
  23. Caballero, Ricardo J & Engel, Eduardo M R A, 1992. "Beyond the Partial-Adjustment Model," American Economic Review, American Economic Association, vol. 82(2), pages 360-64, May.
  24. Robert E. Hall, 1991. "Labor Demand, Labor Supply, and Employment Volatility," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 17-62 National Bureau of Economic Research, Inc.
  25. Timothy F. Bresnahan & Valerie A. Ramey, 1992. "Output Fluctuations at the Plant Level," NBER Working Papers 4105, National Bureau of Economic Research, Inc.
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