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Demand Uncertainty and employment : A cross-country empirical examination

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  • J-F Piferini

    (Département d'économie et de gestion université PARIS 8)

Abstract

I examine the impact of demand uncertainty on a firm's investment decisions. Recent theoretical work accounts for the degree of irreversibility of capital investment. Dixit and Pindyck deliver a clear prediction: an increase in uncertainty lowers current investment. With irreversible investment, uncertainty generates an "option value" to waiting, and investment is delayed in response to increased uncertainty. Similar considerations apply to a firm's hiring and firing decisions. For each of these kinds of decisions there are sunk costs, an uncertain environment, and some freedom of timing. In this study, I focus on the empirical evidence for the impact of demand uncertainty on employment. I use balanced panel data, annual from 1970 to 2000 for 17 countries: the 15 members of the European Union, the United States, and Japan. The results are broadly consistent with models that incorporate irreversibility of capital investment. I first estimate demand volatility using an ARCH specification. I then provide panel regression results, using a system generalized method of moments (GMM-sys) estimator, which suggest that the demand uncertainty has a significant negative impact on employment in these countries

Suggested Citation

  • J-F Piferini, 2005. "Demand Uncertainty and employment : A cross-country empirical examination," Computing in Economics and Finance 2005 251, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:251
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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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