The Economics of Labor Adjustment: Mind the Gap

Russell W. Cooper and Jonathan Willis

No 8527, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the inferences about labor adjustment costs obtained by the 'gap methodology' of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the policy function of a manufacturing plant is assumed to depend on the gap between a target and the current level of employment. Using time series observations, these studies reject the quadratic cost of adjustment model and find that aggregate employment dynamics depend on the cross sectional distribution of employment gaps. We argue that these conclusions may not be justified. Instead these findings may reflect difficulties measuring the gap. Thus it appears that the gap methodology, as currently employed, may be unable to: (i) identify the costs of labor adjustment and (ii) assess the aggregate implications of labor adjustment costs.

JEL-codes: E24 J41 (search for similar items in EconPapers)
Date: 2001-10
New Economics Papers: this item is included in nep-lab
Note: EFG LS
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Citations: View citations in EconPapers (13)

Published as Cooper, Russell and Jonathan L. Willis. "A Comment On The Economics Of Labor Adjustment: Mind The Gap," American Economic Review, 2004, v94(4,Sep), 1223-1237.

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Working Paper: The economics of labor adjustment: mind the gap (2003)
Working Paper: The economics of labor adjustment: mind the gap (2003)
Working Paper: The economics of labor adjustment: mind the gap (2001)
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