Labor Adjustment Costs Research Articles

Market power, dismissal threat, and rent sharing

PurposeThe purpose of this study is to investigate to what extent the existence of high labor adjustment costs has some influence on the process of wage negotiation. In particular, it aims to analyse if the risk of being laid off has any impact on insiders' bargaining power and, consequently, on their wage claims.Design/methodology/approachA collective bargaining model that closely follows those developed by Nickell et al. and Bentolila and Dolado is adopted and a longitudinal panel of large Portuguese firms from all sectors over the 1993‐199 period is used.FindingsThe results reveal that firms where insider workers appear to have more bargaining power tend to pay higher wages. In particular, we found that the threat of dismissal tends to weaken insiders' bargaining power and, consequently, to depress wages.Research limitations/implicationsIn future research an attempt should be made to measure directly the labor turnover costs.Originality/valueThis paper presents robust empirical evidence using micro‐data for individual firms that support one of the predictions of the insider‐outsider theory that wages will be higher in sectors (firms) with high labor turnover costs.

Nominal wage contracts, labor adjustment costs and the business cycle

Previous work of monetary dynamic stochastic general equilibrium models with nominal rigidity a la Taylor, particularly the Cho–Cooley model, was abandoned in favor of the New-Keynesian analysis due to the model's failure to deliver business cycle statistics that match the U.S. economy along some key dimensions. In this paper, we take a step in revitalizing the Cho–Cooley avenue of research. We add empirically plausible labor adjustment costs into a model with nominal wage rigidity and find that with labor adjustment costs our model is able to overcome some of the shortcomings otherwise present in the Cho–Cooley framework, specifically high standard deviations of real variables and a countercyclical productivity.

Non‐stationary Hours in a DSGE Model

The time series fit of dynamic stochastic general equilibrium (DSGE) models often suffers from restrictions on the long‐run dynamics that are at odds with the data. Using Bayesian methods we estimate a stochastic growth model in which hours worked are stationary and a modified version with permanent labor supply shocks. If firms can freely adjust labor inputs, the data support the latter specification. Once we introduce frictions in terms of labor adjustment costs, the overall time series fit improves and the model specification in which labor supply shocks and hours worked are stationary is preferred.

Labor Adjustment Costs in a Panel of Establishments: A Structural Approach

Labor Adjustment Costs in a Panel of Establishments: A Structural Approach

Employment Dynamics and the Structure of Labor Adjustment Costs

In this article we document the patterns of employment adjustment at the micro level. We find clear evidence of lumpy adjustment consistent with the presence of nonconvexities in the adjustment technology—inaction is pervasive, action spells are short‐lived, and extreme adjustment episodes are responsible for a nontrivial share of employment adjustment. We also find that the probability of employment adjustment increases with the duration of inaction. The skill structure of the workforce, the type of employment contract, and the proportion of low‐tenure workers, which we interpret as proxies for the magnitude of adjustment costs, all influence the probability of adjustment.

Factor Utilization and Adjusted Productivity Estimates for the UK

This paper derives series for capital utilization, labour effort and total factor productivity (TFP) for the UK from a general equilibrium model with variable utilization and labour adjustment costs. Capital utilization tracks survey-based measures closely, but persistent movements in total hours worked mean our labour effort series is not as highly correlated with its comparators. Our estimated TFP series is less cyclical than the traditional Solow residual, although a weighted average of capital utilization and labour effort – aggregate factor utilization – and the Solow residual are not closely related.

What do ‘residuals’ from first-order conditions reveal about DGE models?

The first-order condition (FOC) associated with labour in many dynamic general equilibrium models involves only current period variables. Residuals constructed from this FOC are inconsistent with aggregate US data in that they are very large and highly persistent. The persistence suggests that models which introduce dynamic terms in the labour FOC may be more consistent with the data. Three such models (one with learning by doing, one with habit formation, and one with labour adjustment costs) confirm that they can reduce the persistence in the residuals making the models more consistent with the joint dynamics of consumption, output and hours.

Working hours reduction and wage contracting style in a dynamic model with labor adjustment costs

This paper formulates a dynamic framework that highlights the roles of wage contracting style and labor adjustment costs in order to inquire into the short-run transitional dynamics and the long-run steady effects of work-sharing arrangements. We show that the hourly wage system tends to increase the degree of wage flexibility, and therefore hours reductions may be an effective policy in terms of increasing the employment stock. However, within a salary-style wage regime workers’ salaries are fixed by contract, and therefore a policy of reducing working hours will lead firms to hire fewer new workers, thus giving rise to less employment accumulation. Moreover, our analysis of the transition reveals that if the labor adjustment cost is low in response to a pre-announced reduction in working hours, the number of newly hired workers will overshoot its long-run level and will move in the opposite direction during the periods before and after the policy is actually implemented.

Employment Dynamics and the Structure of Labor Adjustment Costs

In this paper we document the patterns of employment adjustment at the micro-level. We find clear evidence of lumpy adjustment consistent with the presence of non-convexities in the adjustment technology - inaction is pervasive, action spells are short-lived, extreme adjustment episodes occur and are responsible for a non-trivial share of employment adjustment. We also find that the probability of employment adjustment increases with the duration of inaction (positive duration dependence). The skill structure of the workforce, the type of employment contract and the proportion of low tenure workers, which we interpret as proxies for the magnitude of adjustment costs, all influence the probability of adjustment.

Labor adjustment costs and complex eigenvalues

Aggregate variables display both persistence and damped oscillations in response to temporary external shocks. The standard real business cycles (RBC) model cannot explain these patterns, because its stable eigenvalues are positive and real. We demonstrate that this model with labor adjustment costs can yield complex eigenvalues. However, numerical experiments suggest that the model cannot display distinguishable damped oscillations of aggregate variables.

Flexibilité des contrats et demande de travail en Belgique

Temporary jobs have spread in an important way during the nineties, especially on the Belgian labour market. From a labour demand point of view, we first stress on the reasons why they might reduce labour adjustment (firing) costs and to a lesser extent other labour costs, but why they might also lower labour productivity. Net effects of temporary jobs are then estimated on dynamic labour demand, assuming that firms are in a monopolistic competition market structure and face quadratic and symetric adjustment costs. The relation is estimated on a panel of 5551 firms observed during the period 1996-2000, using the Blundell and Bond GMM estimator. Our results suggest that higher flexibility through temporary jobs significantly favours the adjustment process but does not influence employment level.

The Effects of Macroeconomic Policy Shocks on the UK Labour Market

This paper discusses the dynamic response of employment, average hours and real wages to monetary, government spending and net taxes shocks in the UK for the 1970 Q1-2003 Q1 period. The response of labour market variables to a monetary policy shock are in line with economic theory and previous empirical evidence. The adjustment of labour input is primarily along the extensive margin. However, there is also significant adjustment along the intensive margin one year after the shock. Over the more recent period this result is overturned with bigger and faster response in average hours two quarters after the shock. We interpret this result as being suggestive of labour market reforms during the 1980s having reduced the labour adjustment costs. A government spending shock leads to negative employment, hours and output responses, while real wages increase. It is attributed to the government consumption part of spending, and in particular its wage bill component. The effect of a net tax shock generates transitory negative effects on employment and hours, that become positive raising output after the second quarter. The output effects of both spending and tax shocks are in line with previous UK evidence.

Premium differentiation in the Unemployment Insurance system and the demand for labor

We simulate the effect of the introduction of premium differentiation (experience rating) in the Dutch Unemployment Insurance system on the demand for labor for a variety of sectors in the Dutch economy. For the simulations we use the Bentolila and Bertola (1990) framework as a point of departure. In the simulations, the introduction of experience rating is modeled as expenditure neutral: in the absence of premium differentiation the cost of financing UI is modeled as a wage tax (independent of the number of workers fired by the firm), whereas in the presence of experience rating this cost is attributed to firing cost (affected by the firing action). Thus, the introduction of experience rating results in a shift from wage cost to firing cost. Following the political debate on the issue in the Netherlands, we assume that the introduction of experience rating does neither lead to a change in tax rates paid by workers nor to a change in eligibility rules or replacement rates of benefit claimants. Specific attention is paid to the distinction between ‘young’ and ‘old’ workers . In the model, labor adjustment costs (hiring and firing costs) are linear. The model allows for uncertainty in the business cycle.

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

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.

Profit Margins, Adjustment Costs and the Business Cycle: An Application to Spanish Manufacturing Firms*

AbstractThe objective of this paper is to investigate the cyclical behaviour of mark‐ups, using a panel of Spanish manufacturing firms over the period 1990–1998. Margins are estimated from the optimal conditions derived from the firm's optimisation problem, which assumes that labour inputs are subject to adjustment costs. A number of results emerge from the estimations. First, we find positive and asymmetric adjustment costs for permanent labour inputs. Second, price‐cost margins are markedly procyclical. Our estimates suggest that labour adjustment costs more than double the variability of average margins with respect to Lerner indexes. Third, we find differences in the parameters of the adjustment technology across industries which make markups of intermediate and production good industries more cyclical than consumer good industries. Finally, industry‐specific price‐cost margins are higher in more concentrated industries.

Explaining Movements in the Labor Share

In this paper we study the evolution of the labor share in the OECD. We show it is essentially related to the capital-output ratio; that this relationship is shifted by factors like the price of imported materials or capital-augmenting technological progress; and that discrepancies between the marginal product of labor and the real wage ---due to, e.g., labor adjustment costs or union wage bargaining--- cause departures from it. We also provide empirical evidence on the determinants of the labor share with panel data on 13 industries and 12 countries for 1972-93.

Factor Utilisation and Productivity Estimates for the United Kingdom

This paper derives series for capital utilisation, labour effort and total factor productivity (TFP) from a general equilibrium model with variable factor utilisation and labour adjustment costs. Impulse responses from the model show that firms initially respond to unanticipated shocks by altering factor utilisation rates. In subsequent periods, firms adjust observable inputs such as physical capital and employment. As a result, utilisation rates are a leading indicator of firms' hiring of both capital and labour. We find that our estimate of capital utilisation tracks survey-based measures quite closely, while movements in total hours worked drive our labour effort series. Our estimate of TFP growth is found to be less cyclical than the rate of growth of a traditional Solow residual. Nevertheless, a weighted average of capital utilisation and labour effort - aggregate factor utilisation - is not closely related to the detrended Solow residual. This suggests that measures that conflate capacity utilisation and temporary deviations in TFP from its steady-state growth rate may be misleading indicators of excess demand pressure. Rather, our measure of aggregate factor utilisation is correlated with detrended labour productivity, providing more evidence that differences in average and marginal labour productivity may be linked to factor hoarding. Labour productivity, when calculated as output per unit of effective labour input, is less cyclical than a simple measure of output per hour.

Aggregate employment, real business cycles, and superior information

We test whether dynamic, stochastic, general equilibrium artificial economies associated with several labor market structures provide an adequate characterization of aggregate employment volatility and dynamics. Our test is robust to possible misspecifications about the information set used by economic agents to forecast future events. Accounting for agents’ superior information, we find that the divisible labor, indivisible labor, labor adjustment costs, and labor hoarding structures replicate employment volatility, in contrast to the nominal wage contracts structure. Also, the labor hoarding structure provides a substantially better account of employment dynamics.

Labor adjustment costs in a destination country: the case of Mexico

Rodrik [Rodrik, D., 1997. Has Globalization Gone Too Far? Institute for International Economics, Washington, DC.] argues that firms use the threat of moving to low-cost (generally developing) markets to make employment more flexible at home. Although a large literature documents significant adjustment costs in developed countries, we know little about their size and importance in developing countries that receive capital. We employ monthly Mexican data from the GATT–NAFTA period to estimate adjustment costs in Mexico. We consider adjustment costs for production and non-production workers and allow for asymmetry. While patterns of adjustment costs are similar as in developed countries, adjustment costs in Mexico are generally an order of magnitude smaller.

The Economics of Labor Adjustment: Mind the Gap

We study the inferences about labor adjustment costs obtained by the \gap of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the policy function of a manufacturing plant is assumed to depend on the gap between a target and the current level of employment. Using time series observations, these studies reject the quadratic cost of adjustment model and find that aggregate employment dynamics depend on the cross sectional distribution of employment gaps. We argue that these conclusions may not be justified. Instead these findings may reflect difficulties measuring the gap. Thus it appears that the gap methodology as currently employed, may be unable to: (i) identify the costs of labor adjustment and (ii) assess the aggregate implications of labor adjustment costs.