On the Optimal Volume of Labor Hoarding
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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