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Demand for LaborThe Neglected Side of the Market$
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Daniel S. Hamermesh and Corrado Giulietti

Print publication date: 2017

Print ISBN-13: 9780198791379

Published to Oxford Scholarship Online: March 2017

DOI: 10.1093/acprof:oso/9780198791379.001.0001

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Labor Demand and the Structure of Adjustment Costs

Labor Demand and the Structure of Adjustment Costs

Chapter:
(p.53) 3 Labor Demand and the Structure of Adjustment Costs*
Source:
Demand for Labor
Author(s):

Daniel S. Hamermesh

Daniel S. Hamermesh

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198791379.003.0003

This study examines the nature of the costs that firms face in adjusting labor demand in response to shocks induced by changes in output demand and prices. Empirical work on monthly plant-level time-series data shows that adjustment proceeds in jumps. Employment is unchanged in response to small demand shocks, but moves instantaneously to a new long-run equilibrium if the shocks are large. Results in the large literature that assumes smooth adjustment are due to aggregation of this inherently nonlinear relation over subunits experiencing different shocks. The finding has implications for cyclical changes in productivity and for examining the effects of policies such as severance pay, layoff and plant-closing restrictions, and mandatory listing of job vacancies, all of which change the cost of adjusting employment.

Keywords:   Lumpy adjustment, employment-output relation, nonlinear costs, fixed costs, aggregation

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