Multi-Plant Firms, Variable Capacity Utilization, and the Aggregate Hours Elasticity

Domenico Ferraro (), Giuseppe Fiori and Damián Pierri ()
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Giuseppe Fiori: https://www.federalreserve.gov/econres/giuseppe-fiori.htm

No 1440, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We develop a business cycle model with perfectly competitive product and labor markets in which production requires a minimum labor input, generating endogenous capacity utilization. The aggregate production function is kinked, featuring constant returns to scale below capacity—typically in recessions—and decreasing returns at capacity in expansions. Motivated by new empirical evidence that narratively identified labor tax shocks have significantly larger effects on hours and output when capacity utilization is below trend, we calibrate the model to U.S. data and show that the aggregate hours elasticity is higher in recessions, differing markedly from the micro elasticity implied by preferences.

Keywords: minimum labor requirements; hours constraints; capacity utilization; state dependence; labor taxation; elasticity of aggregate hours (search for similar items in EconPapers)
JEL-codes: E22 E23 E24 E32 E62 H24 H25 (search for similar items in EconPapers)
Pages: 64 p.
Date: 2026-07-08
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:103520

DOI: 10.17016/IFDP.2026.1440

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