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Estimating Labor Market Rigidities with Heterogeneous Firms

  • Nicolas Roys

the incentive to adjust the workforce. I relax this assumption and introduce wage bargaining with multiple workers. A reduced-form empirical decomposition suggests that transitory shocks to sales have a strong effect on wages, but that permanent shocks have a very small effect on wages. I propose and estimate a structural model of firm behavior that can account for these dynamics: firms adjust relatively less the workforce in response to temporary shocks, leading to higher wages since the labor productivity goes up. The model is estimated using French panel data, through a new indirect inference procedure which allows for heterogeneity in firm parameters. The model fits the data well. Only a small amount of adjustment costs is needed to reproduce observed job reallocation and inaction rates. Permanent shocks are the most important source of output uctuations. Ignoring measurement errors or wage exibility lead to erroneous conclusions. The model with heterogeneous coefficients greatly improves the fit of the observed dispersion of labor productivity compared to a model with homogeneous coeffcients.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 127.

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Date of creation: 2010
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Handle: RePEc:red:sed010:127
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