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Microeconomic Flexibility in India and Pakistan: Employment Adjustment at the Firm Level

  • Theresa Chaudhry


    (Lahore School of Economics, Pakistan.)

In this paper, we look at the pace at which firms adjust their employment levels as a measure of “microeconomic flexibility.” Flexibility aids in creative destruction processes,where less efficient establishments recede and dynamic firms can rapidly expand. Following the techniques used by Caballero, Engel, and Micco (2004), we use firm-level data from India and Pakistan to estimate the proportion of the gap closed in a year between desired and actual employment. The results for the proportion of the gap closed for India were 0.46 in 2001 and 0.45 in 2000. For Pakistan, we estimated the proportion of the gap closed as0.2 in 2001 and 0.53 in 2000. The results for 2001 were much lower than expected (and lower than previous estimates for both countries), possibly due to the events of 9/11. Pakistan compared favorably to India in various key sectors, including chemicals, food processing, and garments. Exporters did not seem to have a quicker speed of adjustment.

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Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

Volume (Year): 14 (2009)
Issue (Month): Special Edition (September)
Pages: 17-27

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Handle: RePEc:lje:journl:v:14:y:2009:i:sp:p:17-27
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  1. Ricardo J. Caballero & Eduardo M.R.A. Engel & John Haltiwanger, 1995. "Aggregate Employment Dynamics: Building From Microeconomic Evidence," NBER Working Papers 5042, National Bureau of Economic Research, Inc.
  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.
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