A Comment on the Economics of Labor Adjustment: Mind the Gap: Evidence from a Monte Carlo Experiment

Christian Bayer

American Economic Review, 2009, vol. 99, issue 5, 2258-66

Abstract: This comment addresses a point raised in Russell Cooper and Jonathan Willis (2003, 2004), which discusses whether the "gap approach" is appropriate to describe the adjustment of production factors. They show that this approach to labor adjustment as applied in Ricardo J. Caballero, Eduardo Engel, and John C. Haltiwanger (1997) and Caballero and Engel (1993) can falsely generate evidence in favor of nonconvex adjustment costs, even if costs are quadratic. Simulating a dynamic model of firm-level employment decisions with quadratic adjustment costs and estimating a gap model from the simulated data, they identify two factors producing this spurious evidence: approximating dynamic adjustment targets by static ones, and estimating the static targets themselves. This comment reassesses whether the first factor indeed leads to spurious evidence in favor of fixed adjustment costs. We show that the numerical approximation of the productivity process is pivotal for Cooper and Willis's finding. With more precise approximations of the productivity process, it becomes rare to falsely reject the quadratic adjustment cost model due to the approximation of dynamic targets by static ones. (JEL E24, J3)

JEL-codes: E24 J23 (search for similar items in EconPapers)
Date: 2009
Note: DOI: 10.1257/aer.99.5.2258
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.5.2258 (application/pdf)
http://www.aeaweb.org/aer/data/dec09/20060065_data.zip (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
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:aea:aecrev:v:99:y:2009:i:5:p:2258-66

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().