Heterogeneity in the effects of uncertainty shocks on labor market dynamics and extensive vs. intensive margins of adjustment

Sangyup Choi, Davide Furceri and Seung Yong Yoo

Journal of Economic Dynamics and Control, 2024, vol. 162, issue C

Abstract: The real option value theory posits that non-convex adjustment costs pertaining to a firm's input are central to comprehending the consequences of increased uncertainty. This paper leverages the diversity observed at both sectoral and country levels in the degree of irreversibility associated with hiring and firing, a critical factor generating what is commonly referred to as “wait-and-see” behavior in times of heightened uncertainty. Our empirical findings reveal two key insights. First, in alignment with the concept of second-moment shocks, uncertainty shocks predominantly influence the labor market through the extensive margin rather than the intensive margin. Second, the effects of uncertainty shocks exhibit pronounced heterogeneity across countries and industries, and the adverse employment effects (extensive margin) are amplified in a country with strict employment protection or in an industry characterized by a higher natural layoff rate, consistent with the real option theory.

Keywords: Uncertainty shocks; Irreversibility; Wait-and-see; Employment protection legislation; Natural layoff rate; Difference-in-difference (search for similar items in EconPapers)
JEL-codes: E24 J20 J50 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188924000514
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Heterogeneity in the Effects of Uncertainty Shocks on Labor Market Dynamics and Extensive vs. Intensive Margins of Adjustment (2024)
Working Paper: Heterogeneity in the Effects of Uncertainty Shocks on Labor Market Dynamics and Extensive vs. Intensive Margins of Adjustment (2024)
Working Paper: Heterogeneity in the Effects of Uncertainty Shocks on Labor Market Dynamics and Extensive vs. Intensive Margins of Adjustment (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:162:y:2024:i:c:s0165188924000514

DOI: 10.1016/j.jedc.2024.104859

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().