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Lumpy labor adjustment as a propagation mechanism of business cycles

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  • Yao, Fang

Abstract

I explore the implications of the lumpy labor adjustment as a propagation mechanism for aggregate dynamics. The model I use nests the basic RBC model with a staggered-job-turnover in the spirit of Taylor (1980) and Calvo (1983). It extends this approach by introducing a Weibull-distributed labor adjustment process to capture increasing hazard rates and heterogeneous labor rigidity in the economy corroborated by the micro data. My principal findings are: uncertainty in the labor adjustment process induces firms to make precautionary labor adjustment (the front-loading effect), amplifying the volatility of labor demand, and that the heterogeneity in labor rigidity leads to aggregate persistence in labor and output. The key message conveyed by this model is that heterogeneity in labor rigidity matters for the aggregate dynamics, and hence includes the information of the distribution of agents enriching the propagation mechanism of the RBC model.

Suggested Citation

  • Yao, Fang, 2008. "Lumpy labor adjustment as a propagation mechanism of business cycles," SFB 649 Discussion Papers 2008-022, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2008-022
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    References listed on IDEAS

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    1. Robert Shimer, 2003. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies: Evidence and Theory," NBER Working Papers 9536, National Bureau of Economic Research, Inc.
    2. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    3. Tommy Sveen & Lutz Weinke, 2005. "Is lumpy investment really irrelevant for the business cycle?," Working Paper 2005/6, Norges Bank.
    4. Julia K. Thomas, 2002. "Is Lumpy Investment Relevant for the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 508-534, June.
    5. Aubhik Khan & Julia K. Thomas, 2008. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," Econometrica, Econometric Society, vol. 76(2), pages 395-436, March.
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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