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Labor Demand and the Structure of Adjustment Costs


  • Daniel S. Hamermesh


This study examines the nature of the costs that firms face in adjusting labor demand in response to shocks induced by changes in output demand and prices. Empirical work on monthly plant-level time-series data shows that adjustment proceeds in jumps. Employment is unchanged in response to small demand shocks, but moves instantaneously to a new long-run equilibrium if the shocks are large. Results in the large literature that assumes smooth adjustment are due to aggregation of this inherently nonlinear relation over subunits experiencing different shocks. The finding has implications for cyclical changes in productivity and for examining the effects of policies such as severance pay, layoff and plant-closing restrictions, and mandatory listing of job vacancies, all of which change the cost of adjusting employment.

Suggested Citation

  • Daniel S. Hamermesh, 1988. "Labor Demand and the Structure of Adjustment Costs," NBER Working Papers 2572, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2572
    Note: LS

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    References listed on IDEAS

    1. Hamermesh, Daniel S., 1987. "The demand for labor in the long run," Handbook of Labor Economics,in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 8, pages 429-471 Elsevier.
    2. Robert J. Gordon, 1979. "The "End-of-Expansion" Phenomenon in Short-Run Productivity Behavior," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 447-462.
    3. Robert J. Barro, 1972. "A Theory of Monopolistic Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 17-26.
    4. Burgess, Simon M, 1988. "Employment Adjustment in UK Manufacturing," Economic Journal, Royal Economic Society, vol. 98(389), pages 81-103, March.
    5. P. K. Trivedi, 1985. "Distributed Lags, Aggregation and Compounding: Some Econometric Implications," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 19-35.
    6. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-1044, December.
    7. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
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