The Joint Behavior of Hiring and Investment

Eran Yashiv ()

No 8237, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper explores the dynamic behavior of investment and hiring within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using structural estimation in aggregate, private sector U.S. data, it shows that the model, which features adjustment costs, is able to fit the data. Unlike many previous results, the fit is achieved without implying high adjustment costs. The interaction of hiring and investment costs is significant and is negatively signed, implying complementarity between investment and hiring. There is a substantial role for labor market conditions in hiring costs, whereby the latter are lower in ?good times.? The fit of the investment part of the model is poor if hiring is left out completely or is introduced without the interaction between the two. The results capture the not so-well known fact whereby there is negative co-movement of gross investment and gross hiring, the former being pro-cyclical while the latter is countercylical. This is so as they follow the cyclical behavior of their present values. An asset-pricing type empirical analysis indicates that the hiring rate depends mostly on future labor profitability while the investment rate depends mostly on future returns.

Keywords: Gross investment; Gross hiriting; Business cycles; Present values of hiring and investment; Forward-looking behavior; Complementarity; Labor market conditions (search for similar items in EconPapers)
JEL-codes: E22 E24 E32 J23 (search for similar items in EconPapers)
Date: 2011-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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