The dynamic demand for capital and labor: Evidence from Chinese industrial firms

Le Tang

Economic Modelling, 2022, vol. 107, issue C

Abstract: This paper employs a structural econometric approach to study the joint dynamic demand for capital and labor in Chinese firms. We recover key structural parameters in a dynamic model of interrelated factor demand subject to joint convex and non-convex costs. The model is able to replicate the stylized facts directly observed from Chinese manufacturing firm-level data over the period 1998–2007. Our estimations reveal that firms exhibit significant convex and fixed costs when adjusting capital or employment stock. Moreover, the adjustments in two factor inputs are inter-related, and adjusting capital and labor simultaneously is more costly than adjusting two inputs sequentially. Our counterfactual analysis suggests that removing the frictions in both capital and labor adjustments will lead to a 1% increase in aggregate total factor productivity (TFP) and a 7% increase in aggregate output.

Keywords: Adjustment costs; Investment dynamics; Labor demand; Interrelation; China (search for similar items in EconPapers)
JEL-codes: D24 E24 J23 P23 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:107:y:2022:i:c:s0264999321003205

DOI: 10.1016/j.econmod.2021.105731

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