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Abstract
We study inferences about the dynamics of labor adjustment
obtained by the "gap methodology" of Caballero and Engel [1993] and Caballero, Engel and Haltiwanger [1997]. In that approach, the
policy function for employment growth is assumed to depend on an unobservable gap between the target and current
levels of employment. Using time series observations, these studies reject the partial adjustment model and find that
aggregate employment dynamics depend on the cross-sectional distribution of employment gaps. Thus, nonlinear adjustment at the
plant level appears to have aggregate implications. We argue that this conclusion is not justified: these findings of nonlinearities
in time series data may reflect mismeasurement of the gaps rather than the aggregation of plant-level nonlinearities.
Keywords: Aggregate Employment, Employment, Adjustment Costs
JEL Codes: E24, J23, J6
Russell Cooper is a professor of economics at Boston University. Jonathan L. Willis is an economist at the Federal Reserve Bank of Kansas
City. The authors are grateful to seminar participants at Boston University, Emory University, the University of British Columbia, theFederal Reserve Bank of Boston, the University of Haifa, the University
of Iowa, the University of Michigan, the University of Pennsylvania, the University of Texas at Austin, the 2002 NBER EF Meeting and
the 2000 CMSG conference at McMaster University for comments and suggestions. Discussions with Eduardo Engel, John Haltiwanger,
Daniel Hamermesh, Peter Klenow and Christopher Ragan were much appreciated. The authors thank the NSF for financial support. The
authors also appreciate comments from the referees and the editor. Russell Cooper thanks the Federal Reserve Bank of Minneapolis for its
hospitality during revisions of this manuscript. The views expressed herein are solely those of the authors and do not necessarily reflect
the views of the Federal Reserve Bank of Kansas City, the Federal Reserve Bank of Minneapolis or the Federal Reserve System.Jonathan L. Willis is an economist at the Federal Reserve Bank of Kansas City. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
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