The Discrete Dynamics of Labor Demand

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This project involves the estimation of a labor demand model which includes both fixed and quadratic variable adjustment costs. The model will be estimated with existing, monthly data for seven durable goods plants and existing data for airline firms and with new, monthly data for fast-food outlets. The goals are to examine whether the fixed adjustment costs that appear to characterize the durable-goods plants describe adjustment elsewhere and to infer whether they reflect costs stemming from: 1) Disruption of arrangements among workers; 2) Complementarity of groups of workers with lumpy capital; and 3) Implicit labor contracts that specify maximum employment with layoffs when demand is low. In addition, a simulation general equilibrium model will be constructed to examine the dynamic effects of taxes and subsidies, noting the incidence of small changes in payroll tax rates, given discrete demand dynamics. The relative impacts of marginal and standard employment subsidies will also be examined when labor demand adjusts discretely. &&The purpose of this research is to examine the how employment is affected by changes in wages and product demand. While there has been a large amount of research on this general issue, no one has examined this using data at the level of the individual plant. As result it has not been possible, up to this point, to infer the true structure of the costs that determine how employment reacts to changes in output and wages. This is regrettable because knowing the nature of these costs would allow us to infer the probable impacts of policies that could affect adjustment costs such as advanced notice of layoffs and plant closings, mandatory listing of job vacancies, and others. This research is important because it should increase our ability to better infer the potential consequences of such policies.