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Interrelationships Between Labor and Capital Adjustment Decisions

  • Edlira Narazani

    (University of Turin)

This paper intends to provide empirical evidence on the interrelationship between employment and capital adjustment decisions. A fixed-effect logit model is employed to estimate this interrelationship using a data set of large Italian firms. Whereas some firms prefer to hire substantially in the same time the investments spike occurs, the others find profitable to anticipate the investments episodes as well. Also, the augmented adjustment-cost function for employment and capital is extended to express the inaction range of employment (capital) adjustment in terms of the inactions range of capital (employment) adjustment and validate the use of a discrete choice modelling thereafter. Investment process occurs more smoothly than employment adjustment process, while hiring process is less smooth that firing process. Convex components seem to be important in the adjustment process of capital. Firms investing in R&D products, MNEs and those older than 25 years prefer to anticipate the investment spikes by hiring one year in advance in addition to the simultaneous hiring. These firms possess a plant-specific asset that allow them to use a higher technology level than the other firms. In turn, this higher technology level requires more skilled labor and thus workers to be trained and used efficiently in their organizational structure. Therefore, these firms will take employment decisions under a longer time horizon and will be inclined to plan carefully their investment decisions and hiring (expansion) strategies on a longer time period. Likewise, it may indicate that they possess superior management expertise that allows them to predict market fluctuations and plan the expansion and investment strategies in advance. Business cycle trend seems correlated with the simultaneous dynamics of factor demands such as it gets stronger in upturns and weaker in downturns.

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Paper provided by EconWPA in its series Labor and Demography with number 0412003.

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Length: 41 pages
Date of creation: 15 Dec 2004
Date of revision:
Handle: RePEc:wpa:wuwpla:0412003
Note: Type of Document - pdf; pages: 41
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  1. Andrew B. Abel & Janice C. Eberly, . "A Unified Model of Investment Under Uncertainty," Rodney L. White Center for Financial Research Working Papers 14-93, Wharton School Rodney L. White Center for Financial Research.
  2. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
  3. Nadiri, M Ishaq & Rosen, Sherwin, 1969. "Interrelated Factor Demand Functions," American Economic Review, American Economic Association, vol. 59(4), pages 457-71, Part I Se.
  4. Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," NBER Working Papers 5260, National Bureau of Economic Research, Inc.
  5. Laura Power, 1998. "The Missing Link: Technology, Investment, And Productivity," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 300-313, May.
  6. M. Ishaq Nadiri & Sherwin Rosen, 1974. "A Disequilibrium Model of Demand for Factors of Production," NBER Books, National Bureau of Economic Research, Inc, number nadi74-1, December.
  7. Letterie, Wilko A. & Pfann, Gerard A. & Polder, J. Michael, 2004. "Factor adjustment spikes and interrelation: an empirical investigation," Economics Letters, Elsevier, vol. 85(2), pages 145-150, November.
  8. Hamermesh, Daniel S. & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers 1371, C.E.P.R. Discussion Papers.
  9. Abel, Andrew B. & Eberly, Janice C., 1998. "The mix and scale of factors with irreversibility and fixed costs of investment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 101-135, June.
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