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Persistence of Shocks and the Reallocation of Labor

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  • Nicolas Roys

    (Federal Reserve Bank of St. Louis)

Abstract

This paper proposes a theoretical and quantitative analysis of the reallocation of labor across firms in response to idiosyncratic shocks of different persistence. Creating and destroying jobs is costly and workers are paid a share of the value of the marginal worker. The model predicts that employment and labor costs react differently to transitory shocks and permanent shocks. Quantitative evaluation of the model on a panel of French firms shows the model performance. Modest adjustment costs are needed to reproduce observed job reallocation and inaction rates. Removing adjustment costs leads to productivity gains of one percent at the steady-state. These gains are fifty percent larger in a economy with only transitory shocks and an order of magnitude lower in an economy with only permanent shocks. Bargaining dampens the reallocation of labor across firms leading to larger efficiency losses from adjustment costs. (Copyright: Elsevier)

Suggested Citation

  • Nicolas Roys, 2016. "Persistence of Shocks and the Reallocation of Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 109-130, October.
  • Handle: RePEc:red:issued:14-182
    DOI: 10.1016/j.red.2016.07.002
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    Cited by:

    1. Michele Battisti & Ryan Michaels & Choonsung Park, 2016. "Labor supply within the firm," ifo Working Paper Series 222, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item

    Keywords

    Firm dynamics; Adjustment costs; Persistence of shocks;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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