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Empirical Evidence on the Cost of Adjustment and Dynamic Labour Demand

  • Robert A. Amano

In this paper the author examines whether there is significant evidence of the effect of adjustment costs on Canadian labour demand. This is an important question, as sluggish adjustment of labour demand resulting from significant adjustment costs may be one factor that could help explain some of the unemployment persistence found in Canadian data. The author uses a linear-quadratic model and attempts to estimate the relative adjustment costs of labour demand as well as its rate of adjustment towards long-run equilibrium. In contrast to others who have examined the dynamic behaviour of labour demand, the author estimates the structural parameters using the Euler equation and employs a limited-information approach that does not require an explicit solution for the model's control variables in terms of the forcing processes. The empirical estimates imply that adjustment costs are about four times more important than disequilibrium costs and that it takes over three and a half years for 90 per cent of labour demand adjustment to be completed. Therefore the author concludes that significant adjustment costs are an important feature of Canadian labour demand and that sluggishness due to these costs may be one explanatory factor in unemployment persistence. Dans le present document, l'auteur cherche a etablir s'il existe des preuves empiriques significatives confortant l'hypothese que les couts d'ajustement de la demande de travail au Canada agissent sur cette derniere. C'est la une importante question, car si cette hypothese se confirmait, cela pourrait contribuer a expliquer en partie la persistance du chomage relevee dans les donnees canadiennes. A l'aide d'un modele quadratique lineaire, l'auteur tente d'estimer les couts d'ajustement relatifs de la demande de travail aussi bien que le rythme d'ajustement de cette derniere vers l'equilibre a long terme. Contrairement aux autres chercheurs qui se sont interesses au comportement dynamique de la demande de travail, l'auteur estime les parametres structurels a l'aide de l'equation d'Euler et d'une methode du maximum de vraisemblance a information limitee qui n'exige pas que les variables de controle du modele soient explicitement resolues en fonction des variables d'impulsion exogenes. Les estimations empiriques impliquent que les couts d'ajustement vers l'equilibre sont environ quatre fois plus eleves que les couts obtenus en l'absence d'equilibre et que l'ajustement de la demande de travail s'acheve dans une proportion de 90 % au bout d'un peu plus de trois ans et demi. Par consequent, l'auteur conclut que les couts d'ajustement eleves de la demande de travail au Canada constituent une importante caracteristique de celle-ci et que la lenteur d'ajustement due a ces couts est une cause possible de la persistance du chomage.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 95-3.

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Handle: RePEc:bca:bocawp:95-3
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