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Frictions and the Joint Behavior of Hiring and Investment

Listed author(s):
  • Yashiv, Eran

    ()

    (Tel Aviv University)

The decisions of firms on investment and hiring play a crucial role in business cycle fluctuations. This paper explores their dynamic behavior in the presence of frictions. It does so within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using estimation of aggregate, private sector U.S. data, it shows that the model with frictions is able to fit the data. A key element is the interaction of hiring and investment costs. It is significant and negatively signed, implying complementarity between investment and hiring. There is a substantial role for aggregate labor market conditions in hiring costs, whereby the latter are lower in "good times." The fit of the investment part of the model is poor if hiring is left out completely or is introduced without the interaction between the two. The results capture the not so-well known fact whereby there is negative co-movement of gross investment and gross hiring, the former being pro-cyclical while the latter is counter-cyclical. This is so as they follow the cyclical behavior of their respective present values. The relevant intertemporal considerations are highlighted. An asset-pricing type empirical analysis of the estimation results indicates that the hiring rate depends mostly on future labor profitability while the investment rate depends mostly on future returns.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6636.

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Length: 76 pages
Date of creation: Jun 2012
Handle: RePEc:iza:izadps:dp6636
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  1. Jordi Galí & Thijs van Rens, 2008. "The vanishing procyclicality of labor productivity," Economics Working Papers 1230, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2010.
  2. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
  3. Ralph S.J. Koijen & Stijn Van Nieuwerburgh, 2011. "Predictability of Returns and Cash Flows," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 467-491, December.
  4. Frederico Belo & Xiaoji Lin & Santiago Bazdresch, 2014. "Labor Hiring, Investment, and Stock Return Predictability in the Cross Section," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 129-177.
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  7. Hubbard, R Glenn & Kashyap, Anil K & Whited, Toni M, 1995. "International Finance and Firm Investment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 683-701, August.
  8. Russell Cooper & John C. Haltiwanger & Jonathan L. Willis, 2010. "Euler-Equation Estimation for Discrete Choice Models: A Capital Accumulation Application," NBER Working Papers 15675, National Bureau of Economic Research, Inc.
  9. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 513-542.
  10. Xiaoji Lin & Jack Favilukis, 2011. "Micro Frictions, Asset Pricing, and Aggregate Implications," 2011 Meeting Papers 466, Society for Economic Dynamics.
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  14. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, July.
  15. Barnichon, Regis, 2010. "Building a composite Help-Wanted Index," Economics Letters, Elsevier, vol. 109(3), pages 175-178, December.
  16. Robert E. Hall, 2004. "Measuring Factor Adjustment Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 899-927.
  17. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series 853, European Central Bank.
  18. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
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