Understanding How Employment Responds to Productivity Shocks in a Model with Inventories

31 Pages Posted: 7 Dec 2012

See all articles by Yongsung Chang

Yongsung Chang

University of Rochester - Department of Economics; Yonsei University - Department of Economics

Andreas Hornstein

Federal Reserve Bank of Richmond

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Date Written: August 1, 2006

Abstract

Whether technological progress raises or lowers aggregate employment in the short run has been the subject of much debate in recent years. Using a simple model of industry employment, we show that cross-industry differences of inventory holding costs, demand elasticities, and price rigidities potentially all affect employment decisions in the face of productivity shocks. In particular, the employment response to a permanent productivity shock is more likely to be positive the less costly it is to hold inventories, the more elastic industry demand is, and the more flexible prices are. Using data on 458 4-digit U.S. manufacturing industries over the period 1958-1996, we find statistically significant effects of variations in inventory holdings and demand elasticities on short-run employment responses, but find less evidence pertaining to the effects of measured price stickiness.

Keywords: productivity, employment, inventory investment, sticky prices

JEL Classification: E13, E22, E31

Suggested Citation

Chang, Yongsung and Hornstein, Andreas and Sarte, Pierre-Daniel, Understanding How Employment Responds to Productivity Shocks in a Model with Inventories (August 1, 2006). FRB Richmond Working Paper No. 06-06. Available at SSRN: https://ssrn.com/abstract=2186160 or http://dx.doi.org/10.2139/ssrn.2186160

Yongsung Chang

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Yonsei University - Department of Economics ( email )

50 Yonsei-Ro
Seoul, 120-749
Korea

Andreas Hornstein (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8266 (Phone)
804-697-8255 (Fax)

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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