Working Paper: NBER ID: w8527
Authors: Russell Cooper; Jonathan L. Willis
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.
Keywords: No keywords provided
JEL Codes: E24; J41; J6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Measurement of employment gap (E24) | Ability to infer labor adjustment costs (J39) |
| Correct measurement of employment gap (E24) | Adjustment rate remains constant (E43) |
| Mismeasured employment gap (E24) | Aggregate employment dynamics depend on distribution of employment gaps (J69) |
| Correct measurement of employment gap (E24) | Aggregate employment dynamics independent of distribution of employment gaps (J69) |