Demand Uncertainty and employment: A cross-country empirical examination

Piferini J-F ()
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Piferini J-F: Département d'économie et de gestion université PARIS 8

No 251, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: I examine the impact of demand uncertainty on a firm's investment decisions. Recent theoretical work accounts for the degree of irreversibility of capital investment. Dixit and Pindyck deliver a clear prediction: an increase in uncertainty lowers current investment. With irreversible investment, uncertainty generates an "option value" to waiting, and investment is delayed in response to increased uncertainty. Similar considerations apply to a firm's hiring and firing decisions. For each of these kinds of decisions there are sunk costs, an uncertain environment, and some freedom of timing. In this study, I focus on the empirical evidence for the impact of demand uncertainty on employment. I use balanced panel data, annual from 1970 to 2000 for 17 countries: the 15 members of the European Union, the United States, and Japan. The results are broadly consistent with models that incorporate irreversibility of capital investment. I first estimate demand volatility using an ARCH specification. I then provide panel regression results, using a system generalized method of moments (GMM-sys) estimator, which suggest that the demand uncertainty has a significant negative impact on employment in these countries

JEL-codes: C23 D81 E24 (search for similar items in EconPapers)
Date: 2005-11-11
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:251

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