Worker's Limited Liability, Turnover and Employment Contracts

The aim of this paper is to examine whether the estimation of labor demand can be affected by individual behavior heterogeneity. We shall consider an error-components model with variable-coefficients, where the coefficients are random and vary accross firms according to the values of time-constant explanatory variables and to a random firm-specific effect. The specification of labor demand which stems from the variable coefficients hypothesis is estimated by the generalized method of moments on a panel of 810 French manufacturing firms. Heterogeneities appear to be strongly significant. When the share of skilled workers is higher, the ajustment speed is lower and the influence of wages on labor demand decreases (in absolute value) as well as that of sector demand shocks. Moreover, a higher market-share leads to a smaller adjustment speed and to an increased influence of wages and industry demand on employment. Our estimates reveal strongly significant heterogeneities in labor demand behavior. However, the study of aggregation biases leads to the conclusion that they are very small. In fact our individual coefficients are uncorrelated with the explanatory variables, and this is a sufficient condition for the absence of aggregation biases.