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Nonconvex adjustment costs, hysteresis, and the macrodynamics of employment

Paulo Mota and Paulo Vasconcelos

Journal of Post Keynesian Economics, 2012, vol. 35, issue 1, 93-112

Abstract: This study provides new evidence on the effects of nonconvex employment adjustment costs at the aggregate level. Using the Preisach model of hysteresis, we find that hysteresis commonly found at the firm level due to nonconvex adjustment costs do not completely vanish at the macro level. Hysteresis signs are particularly present in small firms and less so in large ones. The consequence is that the equilibrium state of employment, instead of being unique, becomes path dependent, that is, determined by the history of previous adjustments. The key implication is that macroeconomic policies designed to stimulate the economy may have long-run effects.

Date: 2012
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Handle: RePEc:mes:postke:v:35:y:2012:i:1:p:93-112