A closer look at the gap. A comment on Cooper and Willis' 'mind the gap' paper

Abstract: Recently, there has been a lively debate between Cooper and Willis (2001,2002,2003a, 2003b) and Caballero and Engel (2004) about the apropriateness of the so-called 'gap approach' to labor adjustment. Cooper and Willis claim that the gap approach is unable to identify non- convex adjustment costs because of a measurement error under the alternative hypothesis of convex costs. This comment assesses the validity of Cooper and Willis' claim by providing evidence from a number of Monte-Carlo experiments. In contrast to Cooper and Willis findings from single simulations, the experiments reveal no tendency to falsely reject the convex-cost hypothesis if one uses the correct one-sided test for non-convexities. In fact, the parameter estimates are typically biased against the hypothesis of non-convex costs. Consequently, there is no tendency to falsely reject although the estimates show substantial excess dispersion as a result of a spurious regression problem.

Keywords: Employment Adjustment; Non-Convex Adjustment Costs; Monte- Carlo Experiments (search for similar items in EconPapers)
JEL-codes: E2 J2 (search for similar items in EconPapers)
Date: 2004-08-17
Note: Type of Document - pdf; pages: 9
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