Labor hoarding and inventories

Yi Wen

No 2005-040, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Labor hoarding is a widely believed empirical behavior of firms and a prominent explanation for procyclical labor productivity. Conventional wisdom attributes labor hoarding to labor adjustment costs. This paper argues that the conventional wisdom is inadequate for understanding labor hoarding because it ignores the role of inventories. Since idle labor can be used to produce inventories, why do firms hoard labor when inventory is an option? Using a dynamic rational expectations model of profit-maximizing firms facing demand uncertainty, this paper studies the dynamic interactions between labor hoarding and inventory accumulation. Closed-form decision rules for labor and inventory decisions are derived. The analysis shows that labor adjustment costs alone are far from sufficient for explaining labor hoarding. ; Earlier title: On the optimal volume of labor hoarding

Keywords: Productivity; Labor supply (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (2)

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