Employment Stickiness in Small Manufacturing Firms

44 Pages Posted: 30 Jun 2006

Date Written: June 2006

Abstract

Small firms often do not change their number of employees from year to year. This paper investigates the role of adjustment costs and indivisibility of labor in the employment stickiness of manufacturing firms with less than 75 employees. When small firms have to adjust employment in units of at least one employee, indivisibility becomes an important source of stickiness. A structural model of dynamic labor demand with adjustment costs and indivisibility is estimated using indirect inference on a panel of small French manufacturing firms. Adjustment cost are estimated to be very small. Indivisibility explains around 50% of the stickiness of employment, adjustment costs explain the other 50%.

Keywords: Indivisibility, labor adjustment costs, employment, sticky

JEL Classification: E24

Suggested Citation

Vermeulen, Philip, Employment Stickiness in Small Manufacturing Firms (June 2006). ECB Working Paper No. 640. Available at SSRN: https://ssrn.com/abstract=905086

Philip Vermeulen (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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