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Frictions and the Joint Behavior of Hiring and Investment


  • 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.

Suggested Citation

  • Yashiv, Eran, 2012. "Frictions and the Joint Behavior of Hiring and Investment," IZA Discussion Papers 6636, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp6636

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    References listed on IDEAS

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    More about this item


    gross investment; gross hiring; frictions; business cycles; present values of hiring and investment; forward-looking behavior; production-based asset pricing; complementarities; labor market conditions;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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