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Interrelationships Between Labor and Capital Adjustment Decisions

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  • Edlira Narazani

    (University of Turin)

Abstract

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.

Suggested Citation

  • Edlira Narazani, 2004. "Interrelationships Between Labor and Capital Adjustment Decisions," Labor and Demography 0412003, EconWPA.
  • Handle: RePEc:wpa:wuwpla:0412003
    Note: Type of Document - pdf; pages: 41
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    File URL: http://econwpa.repec.org/eps/lab/papers/0412/0412003.pdf
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    References listed on IDEAS

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    1. Rosen, Sherwin & Nadiri, M Ishaq, 1974. "A Disequilibrium Model of Demand for Factors of Production," American Economic Review, American Economic Association, vol. 64(2), pages 264-270, May.
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    3. Nadiri, M Ishaq & Rosen, Sherwin, 1969. "Interrelated Factor Demand Functions," American Economic Review, American Economic Association, vol. 59(4), pages 457-471, Part I Se.
    4. 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.
    5. 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.
    6. John Haltiwanger & Russell Cooper & Laura Power, 1999. "Machine Replacement and the Business Cycle: Lumps and Bumps," American Economic Review, American Economic Association, vol. 89(4), pages 921-946, September.
    7. 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.
    8. 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.
    9. 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.
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    Cited by:

    1. Böheim, René & Stiglbauer, Alfred & Winter-Ebmer, Rudolf, 2009. "On the persistence of job creation in old and new firms," Economics Letters, Elsevier, vol. 105(1), pages 17-19, October.
    2. Böheim, René & Stiglbauer, Alfred M. & Winter-Ebmer, Rudolf, 2005. "When and How to Create a Job: The Survival of New Jobs in Austrian Firms," IZA Discussion Papers 1602, Institute for the Study of Labor (IZA).
    3. Juan M. Contreras, 2006. "An Empirical Model of Factor Adjustment Dynamics: Working Paper 2006-13," Working Papers 18250, Congressional Budget Office.
    4. Böheim, René & Stiglbauer, Alfred & Winter-Ebmer, Rudolf, 2005. "On the Persistence of Firm Expansion. The survival of new jobs in Austrian firms," Economics Series 173, Institute for Advanced Studies.
    5. Lapatinas Athanasios, 2012. "On the Interrelation of Capital and Labor Adjustment Costs at the Firm Level," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(3), pages 1-36, September.

    More about this item

    Keywords

    Interrelationship; investment; adjustment; labor;

    JEL classification:

    • J - Labor and Demographic Economics

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