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Reflection on Microeconomic Adjustment Hazard Approach

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  • Edlira Narazani

    (University of Turin)

Abstract

This paper studies the way the adjustment process takes place in labor demand when it is expressed as a Cox proportional hazard model. I use a simulated firm-level panel data based on a threshold model with periods of high and low frequency of employment fluctuations, which is consistent with the infrequent way the adjustment process takes place according to the new theories of adjustment. I model the probability that a firm adjusts its employment level during a time-period as a Cox proportional hazard function dependent on the deviation of its actual employment value variable from its target. I show that the aggregate employment change, based on a high proportion of firms experiencing large employment fluctuations, could be very well represented by the Cox proportional hazard and also could be very well approximated by the empirical mean of the product of the hazard function and the deviations. On the other hand, I show that the aggregate employment change based on a very low proportion of firms facing large employment adjustment can be well represented by a quadratic (nonlinear) adjustment hazard. Finally, I try to conclude that in order to construct a measure of deviation from the target level (which is the state variable of the model) the regression of the employment fluctuation on the wage fluctuation could be more helpful than the regression of the employment fluctuation on the hours fluctuation.

Suggested Citation

  • Edlira Narazani, 2004. "Reflection on Microeconomic Adjustment Hazard Approach," Labor and Demography 0410011, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpla:0410011
    Note: Type of Document - pdf; pages: 36
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/lab/papers/0410/0410011.pdf
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    References listed on IDEAS

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    1. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, January.
    2. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
    3. Hamermesh, Daniel S, 1989. "Labor Demand and the Structure of Adjustment Costs," American Economic Review, American Economic Association, vol. 79(4), pages 674-689, September.
    4. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters,in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186 National Bureau of Economic Research, Inc.
    5. John Haltiwanger & Steven J. Davis, 1999. "On the Driving Forces behind Cyclical Movements in Employment and Job Reallocation," American Economic Review, American Economic Association, vol. 89(5), pages 1234-1258, December.
    6. Andrew S. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 703-725.
    7. Andrew Caplin & John Leahy, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 683-708.
    8. Caballero, Ricardo J & Engel, Eduardo M R A & Haltiwanger, John, 1997. "Aggregate Employment Dynamics: Building from Microeconomic Evidence," American Economic Review, American Economic Association, vol. 87(1), pages 115-137, March.
    9. Caplin, Andrew S, 1985. "The Variability of Aggregate Demand with (S, s) Inventory Policies," Econometrica, Econometric Society, vol. 53(6), pages 1395-1409, November.
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    JEL classification:

    • J - Labor and Demographic Economics

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