Turnover and the Dynamics of Labor Demand

Daniel Hamermesh and Gerard Pfann

No 4204, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The theory of the dynamics of labor demand is based either on the costs of adjusting the level of employment or on the costs of hiring or firing (of gross changes in employment). We write down a generalized cost of adjustment function that includes both types of cost and allows for asymmetries in those costs. We derive the firm's rational-expectations profit - maximizing path of employment demand and the Euler equation whose parameters we estimate. Identifying the two types of costs requires complete data on turnover, which were available for the U.S. through 1981. We use these data for manufacturing to demonstrate that both types of adjustment cost figure in the representative firm's profit-maximizing decisions about employment, and that both types of cost are asymmetric (leading here to quicker increases than decreases in employment).

Date: 1992-10
Note: LS
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Citations: View citations in EconPapers (6)

Published as Economica, Vol.63, No.3, pp.359-367, August 1996.

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