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On the Optimal Volume of Labor Hoarding

  • Wen, Yi

    (Cornell U)

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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.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 03-14.

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Date of creation: Nov 2003
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Handle: RePEc:ecl:corcae:03-14
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  1. Kahn, James A, 1987. "Inventories and the Volatility of Production," American Economic Review, American Economic Association, vol. 77(4), pages 667-79, September.
  2. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1990. "Labor Hoarding and the Business Cycle," NBER Working Papers 3556, National Bureau of Economic Research, Inc.
  3. 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.
  4. Fair, Ray C, 1985. "Excess Labor and the Business Cycle," American Economic Review, American Economic Association, vol. 75(1), pages 239-45, March.
  5. Rotemberg, Julio J & Summers, Lawrence H, 1990. "Inflexible Prices and Procyclical Productivity," The Quarterly Journal of Economics, MIT Press, vol. 105(4), pages 851-74, November.
  6. Ben S. Bernanke & Martin L. Parkinson, 1990. "Procyclical Labor Productivity and Competing Theories of the Business Cycle: Some Evidence from Interwar U.S. Manufacturing Industries," NBER Working Papers 3503, National Bureau of Economic Research, Inc.
  7. Alan S. Blinder, 1981. "Inventories and Sticky Prices: More on the Microfoundations of Macroeconomics," NBER Working Papers 0620, National Bureau of Economic Research, Inc.
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