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Employment Changes, the Structure of Adjustment Costs, and Firms' Size


  • Nilsen, Øivind

    (University of Bergen)

  • Salvanes, Kjell G.

    (Norwegian School of Economics and Business Administration)

  • Schiantarelli, Fabio

    (Boston College)


In this paper we analyze the pattern of employment adjustment at the plant level using a rich data set for Norway. We first document the stylized facts about employment changes in small and large plants. The data reveals important differences across size classes. In particular, episodes of zero net employment changes are more frequent for smaller plants. A simple "q" model of labor demand is then developed, allowing for the presence of fixed, linear and convex components in adjustment costs. Econometric estimation supports the importance of departing from traditional models of labor demand based solely on symmetric convex adjustment costs. Fixed (or linear) components of adjustment costs are important. There is, moreover, evidence that fixed costs contain a component that are unrelated to size, in addition to a components proportional to size. As a result, the range of inaction is wider for smaller plants. Finally, the quadratic components of costs are asymmetric and, although some ambiguities exist about the nature of the asymmetry, the more general models indicate that it is more costly at the margin to contract employment than to expand it.

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  • Nilsen, Øivind & Salvanes, Kjell G. & Schiantarelli, Fabio, 2000. "Employment Changes, the Structure of Adjustment Costs, and Firms' Size," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 A1-4, International Conferences on Panel Data.
  • Handle: RePEc:cpd:pd2002:a1-4

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    References listed on IDEAS

    1. Jonas D. M. Fisher & Jeffrey R. Campbell, 2000. "Aggregate Employment Fluctuations with Microeconomic Asymmetries," American Economic Review, American Economic Association, vol. 90(5), pages 1323-1345, December.
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    3. Salvanes, Kjell G, 1997. " Market Rigidities and Labour Market Flexibility: An International Comparison," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 315-333, June.
    4. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
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    7. Hamermesh, Daniel S, 1989. "Labor Demand and the Structure of Adjustment Costs," American Economic Review, American Economic Association, vol. 79(4), pages 674-689, September.
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    12. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
    13. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 819-863.
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    15. Hamermesh, Daniel S, 1995. "Labour Demand and the," Economic Journal, Royal Economic Society, vol. 105(430), pages 620-634, May.
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    More about this item


    Adjustment costs; employment demand; size;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity


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