FEEM working papers "Note di lavoro" series
2001 .020

Dynamic Labour Demand with Lumpy and Kinked Adjustment Costs


Authors: Paola Rota
Series: Economy and Society
Type: Journal
Keywords: adjustment costs,dynamic labour demand,discrete decision process
JEL n.: J32C23
JEL: International Economic Review
Date: 2004

Abstract

We analyse the dynamics of firms' employment decisions which underlie lumpy and kinked adjustment costs. We consider a dynamic structural model in which, in each period, firms face a choice of whether to vary the labour input or to postpone the adjustment to the future. By exploiting the first order condition for optimality, we derive a semi-reduced form in which firms' intertemporal employment are defined by a standard static marginal productivity condition augmented by a forward-looking term. In this way we obtain a marginal productivity equilibrium relation which takes into account the future alternatives of adjustment or non-adjustment that firms face as the result of the presence of fixed and linear adjustment costs. Linear costs amount to 35% of average labour costs and fixed costs are estimated to be about 3.65 times average unit labour costs.

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