THE INTENSIVE MARGIN PUZZLE AND LABOR MARKET ADJUSTMENT COSTS

Dennis Wesselbaum

Macroeconomic Dynamics, 2016, vol. 20, issue 6, 1458-1476

Abstract: This paper documents a puzzling fact, namely that there is a significant negative relation between employment protection legislation and the usage of the intensive margin of labor market adjustments. I make use of a real business cycle model and introduce search and matching frictions as well as adjustment costs along the extensive and the intensive labor market margins. I show that the model is able to replicate the observed patterns of cyclicality, volatility, and especially the behavior of extensive and intensive margins if we assume low firing costs and relatively high hours adjustment costs.

Date: 2016
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