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

23 Pages Posted: 7 Nov 2007

See all articles by João Ejarque

João Ejarque

University of Essex - Department of Economics

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

Date Written: October 2007

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.

Keywords: adjustment costs, employment, rigidity

JEL Classification: C33, C41, E24, J23

Suggested Citation

Gil Ejarque, João Miguel and Portugal, Pedro, Labor Adjustment Costs in a Panel of Establishments: A Structural Approach (October 2007). IZA Discussion Paper No. 3091, Available at SSRN: https://ssrn.com/abstract=1028203

João Miguel Gil Ejarque

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Pedro Portugal (Contact Author)

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085
Portugal

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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