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A closer look at the gap. A comment on Cooper and Willis' 'mind the gap' paper

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  • Christian Bayer

    (Universität Dortmund)

Abstract

Recently, there has been a lively debate between Cooper and Willis (2001,2002,2003a, 2003b) and Caballero and Engel (2004) about the apropriateness of the so-called 'gap approach' to labor adjustment. Cooper and Willis claim that the gap approach is unable to identify non- convex adjustment costs because of a measurement error under the alternative hypothesis of convex costs. This comment assesses the validity of Cooper and Willis' claim by providing evidence from a number of Monte-Carlo experiments. In contrast to Cooper and Willis findings from single simulations, the experiments reveal no tendency to falsely reject the convex-cost hypothesis if one uses the correct one-sided test for non-convexities. In fact, the parameter estimates are typically biased against the hypothesis of non-convex costs. Consequently, there is no tendency to falsely reject although the estimates show substantial excess dispersion as a result of a spurious regression problem.

Suggested Citation

  • Christian Bayer, 2004. "A closer look at the gap. A comment on Cooper and Willis' 'mind the gap' paper," Macroeconomics 0408010, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0408010
    Note: Type of Document - pdf; pages: 9
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    References listed on IDEAS

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    1. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 359-383.
    2. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
    3. Russell W. Cooper & Jonathan L. Willis, 2001. "The economics of labor adjustment : mind the gap," Research Working Paper RWP 01-06, Federal Reserve Bank of Kansas City.
    4. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2004. "Three Strikes and You're Out: Reply to Cooper and Willis," NBER Working Papers 10368, National Bureau of Economic Research, Inc.
    5. Russell Cooper & Jonathan Willis, 2009. "The Cost of Labor Adjustment: Inferences from the Gap," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 632-647, October.
    6. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier.
    7. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
    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.
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    Cited by:

    1. Bayer, Christian, 2006. "Investment dynamics with fixed capital adjustment cost and capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1909-1947, November.
    2. Christian Bayer, 2001. "Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections," Discussion Papers in Economics 01_13, University of Dortmund, Department of Economics.

    More about this item

    Keywords

    Employment Adjustment; Non-Convex Adjustment Costs; Monte- Carlo Experiments;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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