The Economics of Labor Adjustment: Mind the Gap

FRB of Kansas City Working Paper No. 03-05

25 Pages Posted: 17 Dec 2001

See all articles by Jonathan L. Willis

Jonathan L. Willis

Federal Reserve Bank of Kansas City

Russell Cooper

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 2003

Abstract

We study inferences about the dynamics of labor adjustment obtained by the "gap methodology" of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the policy function for employment growth is assumed to depend on an unobservable gap between the target and current levels of employment. Using time series observations, these studies reject the partial adjustment model and find that aggregate employment dynamics depend on the cross-sectional distribution of employment gaps. Thus, nonlinear adjustment at the plant level appears to have aggregate implications. We argue that this conclusion is not justified: these findings of nonlinearities in time series data may reflect mismeasurement of the gaps rather than the aggregation of plant-level nonlinearities.

Keywords: Aggregate Employment, Employment, Adjustment Costs

JEL Classification: E24, J23, J6

Suggested Citation

Willis, Jonathan and Cooper, Russell W., The Economics of Labor Adjustment: Mind the Gap (July 2003). FRB of Kansas City Working Paper No. 03-05. Available at SSRN: https://ssrn.com/abstract=293970 or http://dx.doi.org/10.2139/ssrn.293970

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)

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

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