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Labor Adjustment Costs in a Panel of Establishments: A Structural Approach

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  • Pedro Portugal
  • João Ejarque

Abstract

This paper estimates a structural model of the employment decision of the firm. Our establishment level data displays an extreme degree of rigidity in that employment levels are largely constant throughout our sample. This can be due to the fact that establishments face large shocks but also large adjustment costs, or alternatively that they incur no adjustment costs but that shocks are negligible. Given our identifying assumptions, we find that rigidity is due to adjustment costs and not to the shock process. We further find that these costs reduce the value of the firm as much as 5%. Finally, small fixed costs of adjustment have a large impact on entry and exit job flows.

Suggested Citation

  • Pedro Portugal & João Ejarque, 2007. "Labor Adjustment Costs in a Panel of Establishments: A Structural Approach," Working Papers w200716, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w200716
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    References listed on IDEAS

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    1. Cooper, Russell & Haltiwanger, John & Willis, Jonathan L., 2015. "Dynamics of labor demand: Evidence from plant-level observations and aggregate implications," Research in Economics, Elsevier, vol. 69(1), pages 37-50.
    2. Lee, Bong-Soo & Ingram, Beth Fisher, 1991. "Simulation estimation of time-series models," Journal of Econometrics, Elsevier, vol. 47(2-3), pages 197-205, February.
    3. José Varejão & Pedro Portugal, 2007. "Employment Dynamics and the Structure of Labor Adjustment Costs," Journal of Labor Economics, University of Chicago Press, vol. 25(1), pages 137-165.
    4. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
    5. Brown, Bryan W & Newey, Whitney K, 2002. "Generalized Method of Moments, Efficient Bootstrapping, and Improved Inference," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 507-517, October.
    6. Pedro Portugal & José Varejão, 2004. "Matching Workers to Jobs in the Fast Lane: the Operation of Fixed-term Contracts," Working Papers w200410, Banco de Portugal, Economics and Research Department.
    7. Paola Rota, 2004. "Estimating Labor Demand with Fixed Costs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 25-48, February.
    8. Olympia Bover & Pilar García-Perea & Pedro Portugal, 2000. "Labour market outliers: Lessons from Portugal and Spain," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(31), pages 380-428.
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    Citations

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    Cited by:

    1. Athanasios Lapatinas, 2015. "Multinational versus National Firms on Labour Adjustment Costs: A Structural Approach," Journal of Labor Research, Springer, vol. 36(4), pages 427-441, December.
    2. Oivind A. Nilsen & Joao M. Ejarque, 2007. "Identifying Adjustment Costs of Net and Gross Employment Changes," 2007 Meeting Papers 670, Society for Economic Dynamics.
    3. Addison, John T. & Portugal, Pedro & Varejão, José, 2014. "Labor demand research: Toward a better match between better theory and better data," Labour Economics, Elsevier, vol. 30(C), pages 4-11.
    4. Berger, Johannes & Strohner, Ludwig, 2020. "Documentation of the PUblic Policy Model for Austria and other European countries (PUMA)," Research Papers 11, EcoAustria – Institute for Economic Research.
    5. Lechthaler, Wolfgang & Snower, Dennis J., 2013. "Quadratic Labor Adjustment Costs, Business Cycle Dynamics, And Optimal Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 17(2), pages 464-475, March.
    6. Chemla, Gilles & Hennessy, Christopher, 2019. "Equilibrium Counterfactuals," CEPR Discussion Papers 14146, C.E.P.R. Discussion Papers.
    7. Lapatinas, Athanasios, 2009. "Labour adjustment costs: Estimation of a dynamic discrete choice model using panel data for Greek manufacturing firms," Labour Economics, Elsevier, vol. 16(5), pages 521-533, October.
    8. Gilles Chemla & Christopher Hennessy, 2021. "Equilibrium Counterfactuals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(2), pages 639-669, May.
    9. Yaman, F., 2011. "The costs of adjusting labor: Evidence from temporally disaggregated data," Working Papers 11/10, Department of Economics, City University London.
    10. Yaman, F., 2016. "Structural Estimation of Labor Adjustment Costs," Working Papers 15/22, Department of Economics, City University London.
    11. Lapatinas Athanasios, 2012. "On the Interrelation of Capital and Labor Adjustment Costs at the Firm Level," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(3), pages 1-36, September.

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    More about this item

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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