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A closer look at the gap. A comment on Cooper and Willis' 'mind the gap' paper

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Christian Bayer (Universität Dortmund)

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Abstract

Recently, there has been a lively debate between Cooper and Willis (2001,2002,2003a, 2003b) and Caballero and Engel (2004) about the apropriateness of the so-called 'gap approach' to labor adjustment. Cooper and Willis claim that the gap approach is unable to identify non- convex adjustment costs because of a measurement error under the alternative hypothesis of convex costs. This comment assesses the validity of Cooper and Willis' claim by providing evidence from a number of Monte-Carlo experiments. In contrast to Cooper and Willis findings from single simulations, the experiments reveal no tendency to falsely reject the convex-cost hypothesis if one uses the correct one-sided test for non-convexities. In fact, the parameter estimates are typically biased against the hypothesis of non-convex costs. Consequently, there is no tendency to falsely reject although the estimates show substantial excess dispersion as a result of a spurious regression problem.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0408010.

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Length: 9 pages
Date of creation: 17 Aug 2004
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Handle: RePEc:wpa:wuwpma:0408010

Note: Type of Document - pdf; pages: 9
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Web page: http://129.3.20.41

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Related research
Keywords: Employment Adjustment; Non-Convex Adjustment Costs; Monte- Carlo Experiments;

Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
J2 - Labor and Demographic Economics - - Demand and Supply of Labor

This paper has been announced in the following NEP Reports:

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  1. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-37, March. [Downloadable!] (restricted)
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  2. Caballero, Ricardo J & Engel, Eduardo M R A, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 359-83, May. [Downloadable!] (restricted)
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  3. Russell Cooper & Jonathan L. Willis, 2003. "The economics of labor adjustment : mind the gap," Research Working Paper RWP 03-05, Federal Reserve Bank of Kansas City. [Downloadable!]
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  4. Russell W. Cooper & Jonathan Willis, 2003. "The Cost of Labor Adjustment: Inferences from the Gap," NBER Working Papers 10006, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2004. "Three Strikes and You're Out: Reply to Cooper and Willis," Cowles Foundation Discussion Papers 1456, Cowles Foundation, Yale University. [Downloadable!]
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  6. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
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  7. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-2), pages 1-54. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Bayer, 2004. "Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections," Macroeconomics 0411018, EconWPA. [Downloadable!]
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