The Economics of Labor Adjustment: Mind the Gap

37 Pages Posted: 4 Oct 2001 Last revised: 12 Mar 2013

See all articles by Russell Cooper

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Jonathan L. Willis

Federal Reserve Bank of Kansas City

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

We study the inferences about labor adjustment costs obtained by the 'gap methodology' 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.

Suggested Citation

Cooper, Russell W. and Willis, Jonathan, The Economics of Labor Adjustment: Mind the Gap (October 2001). NBER Working Paper No. w8527. Available at SSRN: https://ssrn.com/abstract=286199

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonathan Willis

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
816-881-2852 (Phone)
816-881-2199 (Fax)

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