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

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.