Working Paper

The cost of labor adjustment : inferences from the gap

Abstract: We study labor adjustment costs. We specify a dynamic optimization problem at the plant-level, allowing for both convex and non-convex adjustment costs. We estimate the parameters of the adjustment process using an indirect inference procedure in which simulated moments are matched with data moments. For this study we use estimates of reduced form adjustment functions obtained by the \"gap methodology\" reported in Caballero and Engel (1993). Contrary to evidence at the micro level in support of non-convex adjustment costs, our preliminary findings indicate that piecewise quadratic adjustment costs are sufficient to match these aggregate moments.

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2002

Number: RWP 02-11