A Comment on the Economics of Labor Adjustment: Mind the Gap: Rejoinder

Abstract

Numerous papers in this literature have used these questions as motivation. Understanding the structure of labor adjustment costs is relevant any time a policy or forecasting question requires input on the properties of labor dynamics. Of course, for some policy questions, we are interested in the aggregate effects of policies. Hence understanding whether nonconvexities have implications for aggregate labor demand is crucial as well. In terms of the ongoing discussion over these questions, there seems to be agreement that the simple quadratic adjustment cost model is not an adequate representation of the costs plants face in adjusting the number of workers. From data displayed by Daniel Hamermesh (1989) and Caballero et al. (1997), hereafter CEH, one is certainly struck by both the inactivity of labor adjustment and the bursts of job creation and destruction at the plant level. That said, while these observations serve as evidence against a model which contains only quadratic adjustment costs, they do not directly identify a particular structure of adjustment costs at the plant level. Inspection of the adjustment patterns reported in CEH, though cast in terms of gaps, does provide some evidence of partial adjustment and thus suggests the presence of both convex and nonconvex adjustment costs. Further, Caballero and Engel (1993), hereafter CE, and CEH appear to have provided useful evidence on the second question: the nonlinearities they uncover in aggregated data suggest that nonconvexities at the plant level have aggregate implications.