Lumpy labor adjustment as a propagation mechanism of business cycles

Fang Yao

No 2008-022, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: I explore the implications of the lumpy labor adjustment as a propagation mechanism for aggregate dynamics. The model I use nests the basic RBC model with a staggered-job-turnover in the spirit of Taylor (1980) and Calvo (1983). It extends this approach by introducing a Weibull-distributed labor adjustment process to capture increasing hazard rates and heterogeneous labor rigidity in the economy corroborated by the micro data. My principal findings are: uncertainty in the labor adjustment process induces firms to make precautionary labor adjustment (the front-loading effect), amplifying the volatility of labor demand, and that the heterogeneity in labor rigidity leads to aggregate persistence in labor and output. The key message conveyed by this model is that heterogeneity in labor rigidity matters for the aggregate dynamics, and hence includes the information of the distribution of agents enriching the propagation mechanism of the RBC model.

Keywords: Business cycles; Heterogeneous labor rigidity; Weibull distribution; Increasing hazard function (search for similar items in EconPapers)
JEL-codes: E22 E24 E32 (search for similar items in EconPapers)
Date: 2008
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