Dynamics of Labor Demand: Evidence from Plant-level Observations and Aggregate Implications

By Russell Cooper, John Haltiwanger, and Jonathan L. Willis
December 2003 
RWP 03-12
Research Division 
Federal Reserve Bank of Kansas City 

Abstract

      This paper studies the dynamics of labor demand at the micro and aggregate level. The correlation of hours and employment growth is negative at the plant level and positive in aggregate time series. Further, hours and employment growth are about equally volatile at the plant level while hours growth is much less volatile than employment growth in the aggregate data. Given these differences, we specify and estimate the parameters of a plant-level dynamic optimization problem using simulated method of moments to match plant-level observations. Our findings indicate that non-convex adjustment costs are critical for explaining plant-level moments on hours and employment. Aggregation generates time-series implications which are broadly consistent with observation. Further, we find that a model with quadratic adjustment costs alone can also broadly match the aggregate facts.

Keywords: Adjustment Costs, Employment, Aggregate Employment

JEL Codes: E24, J23, J6

Russell Cooper is a professor of economics at the University of Texas at Austin. John Haltiwanger is a professor of economics at the University of Maryland. Jonathan Willis is an economist at the Federal Reserve Bank of Kansas City. The authors are grateful to participants at the 2003 Madrid Conference on Lumpy Investment, Durable Purchases and Technical Change, the 2003 Society of Economic Dynamics conference and the 2003 ITAM-University of Texas Conference. The authors thank the NSF for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Cooper e-mail:  cooper@eco.utexas.edu
Haltiwanger e-mail:  haltiwan@econ.umd.edu
Willis e-mail:  Jonathan.Willis@kc.frb.org

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