Dynamic Labor Demand with Lumpy and Kinked Adjustment Costs
34 Pages Posted: 8 Jul 2001
Date Written: April 2001
We analyze 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 labor 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 labor costs, and fixed costs are estimated to be about 3.65 times average unit labor costs.
Keywords: adjustment costs, dynamic labor demand, discrete decision process
JEL Classification: J32, C23
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