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Dynamics of labor demand : evidence from plant-level observations and aggregate implications

  • Russell W. Cooper
  • John Haltiwanger
  • Jonathan L. Willis

This paper studies the dynamics of labor demand at the micro and aggregate level. The correlation of hours and employment growth is negative at the plant level and positive in aggregate time series. Further, hours and employment growth are about equally volatile at the plant level while hours growth is much less volatile than employment growth in the aggregate data. Given these differences, we specify and estimate the parameters of a plant-level dynamic optimization problem using simulated method of moments to match plant-level observations. Our findings indicate that non-convex adjustment costs are critical for explaining plant-level moments on hours and employment. Aggregation generates time-series implications which are broadly consistent with observation. Further, we find that a model with quadratic adjustment costs alone can also broadly match the aggregate facts.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 03-12.

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Date of creation: 2003
Date of revision:
Handle: RePEc:fip:fedkrw:rwp03-12
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  1. Daniel S. Hamermesh, 1988. "Labor Demand and the Structure of Adjustment Costs," NBER Working Papers 2572, National Bureau of Economic Research, Inc.
  2. Daniel S. Hamermesh, 1993. "Labor Demand and the Source of Adjustment Costs," NBER Working Papers 4394, National Bureau of Economic Research, Inc.
  3. Thomas J. Sargent, 1978. "Estimation of dynamic labor demand schedules under rational expectations," Staff Report 27, Federal Reserve Bank of Minneapolis.
  4. Dale T. Mortensen & Christopher A. Pissarides, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 397-415.
  5. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  6. John Haltiwanger & Russell Cooper, 1992. "The Aggregate Implications Of Machine Replacement: Theory And Evidence," Working Papers 92-12, Center for Economic Studies, U.S. Census Bureau.
  7. Ricardo J. Caballero & Eduardo M.R.A. Engel & John Haltiwanger, 1995. "Aggregate Employment Dynamics: Building From Microeconomic Evidence," NBER Working Papers 5042, National Bureau of Economic Research, Inc.
  8. Russell W. Cooper & Jonathan L. Willis, 2002. "The cost of labor adjustment : inferences from the gap," Research Working Paper RWP 02-11, Federal Reserve Bank of Kansas City.
  9. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
  10. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 359-383.
  11. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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