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On the Optimal Volume of Labor Hoarding

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  • Wen, Yi

    (Cornell U)

Abstract

Using a rational expectations model of profit maximizing firms facing demand uncertainty, this paper derives a closed-form relationship between the optimal volume of labor hoarding and other important economic variables such as profit, expected demand, interest rate, inventory level, output price and wage costs. An important insight gained from the analysis is that profit-seeking firms have incentives to enhance supply flexibility by holding not only goods inventories but also excess supplies of labor in reserve, so as to fully guard against demand uncertainty. The optimal target level of labor hoarding is shown to be a function of the variance of demand, the price level as well as the costs of production. The analysis confirms Blinder's (1982) conjecture regarding firms' strategic behavior under demand uncertainty. That is, inventories of labor are partial substitutes for inventories of goods as a means to cope with demand shocks.

Suggested Citation

  • Wen, Yi, 2003. "On the Optimal Volume of Labor Hoarding," Working Papers 03-14, Cornell University, Center for Analytic Economics.
  • Handle: RePEc:ecl:corcae:03-14
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    File URL: https://cae.economics.cornell.edu/cae0314.pdf
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    References listed on IDEAS

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    1. Fair, Ray C, 1985. "Excess Labor and the Business Cycle," American Economic Review, American Economic Association, vol. 75(1), pages 239-245, March.
    2. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-273, April.
    3. Julio J. Rotemberg & Lawrence H. Summers, 1990. "Inflexible Prices and Procyclical Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 851-874.
    4. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-679, September.
    5. Bernanke, Ben S & Parkinson, Martin L, 1991. "Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 439-459, June.
    6. Wen Yi, 2004. "What Does It Take to Explain Procyclical Productivity?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-40, June.
    7. Blinder, Alan S, 1982. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," American Economic Review, American Economic Association, vol. 72(3), pages 334-348, June.
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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