Spatial and Temporal Aggregation in the Estimation of Labor Demand Functions

23 Pages Posted: 21 Apr 2007

See all articles by José Varejão

José Varejão

Universidade do Porto - Faculdade de Economia (FEP)

Pedro Portugal

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

Date Written: March 2007

Abstract

The consequences of aggregation, temporal or spatial, for the estimation of demand models are theoretically well-known, but have not been documented empirically with appropriate data before. In this paper we conduct a simple, but instructive, exercise to fill in this gap, using a large quarterly dataset at the establishment-level that is increasingly aggregated up to the 2-digit SIC industry and the yearly frequency. We only obtain sensible results with the quadratic adjustment cost model at the most aggregated levels. Indeed, the results for quadratic adjustment costs confirm that aggregation along both dimensions works to produce more reasonable estimates of the parameters of interest. The fixed adjustment cost model performs remarkably well with quarterly, but also with yearly, data. We argue that is may be one more consequence of the unusually high labor adjustment costs in the Portuguese labor market.

Keywords: labor demand, adjustment costs, aggregation

JEL Classification: J21, J23

Suggested Citation

Varejão, José and Portugal, Pedro, Spatial and Temporal Aggregation in the Estimation of Labor Demand Functions (March 2007). IZA Discussion Paper No. 2701, Available at SSRN: https://ssrn.com/abstract=981681

José Varejão

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

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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