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NBER WORKING PAPER SERIES THE COST OF LABOR ADJUSTMENT: INFERENCES FROM THE GAP Russell Cooper Jonathan Willis Working Paper 10006 http://www.nber.org/papers/w10006 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2003 The authors thank the NSF for financial support. Cooper thanks the Federal Reserve Bank of Minneapolis for its hospitality during revisions of this manuscript. The views expressed herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Kansas City, the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or National Bureau of Economic Research. ©2003 by Russell Cooper and Jonathan Willis. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

NBER WORKING PAPER SERIES THE COST OF LABOR … · 2020. 3. 20. · The Cost ofLabor Adjustment: Inferences from the Gap Russell Cooper and Jonathan Willis NBER Working Paper No

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Page 1: NBER WORKING PAPER SERIES THE COST OF LABOR … · 2020. 3. 20. · The Cost ofLabor Adjustment: Inferences from the Gap Russell Cooper and Jonathan Willis NBER Working Paper No

NBER WORKING PAPER SERIES

THE COST OF LABOR ADJUSTMENT:INFERENCES FROM THE GAP

Russell CooperJonathan Willis

Working Paper 10006http://www.nber.org/papers/w10006

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138September 2003

The authors thank the NSF for financial support. Cooper thanks the Federal Reserve Bank of Minneapolisfor its hospitality during revisions of this manuscript. The views expressed herein are those of the authorsand are not necessarily those of the Federal Reserve Bank of Kansas City, the Federal Reserve Bank ofMinneapolis, the Federal Reserve System, or National Bureau of Economic Research.

©2003 by Russell Cooper and Jonathan Willis. All rights reserved. Short sections of text, not to exceed twoparagraphs, may be quoted without explicit permission provided that full credit, including © notice, is givento the source.

Page 2: NBER WORKING PAPER SERIES THE COST OF LABOR … · 2020. 3. 20. · The Cost ofLabor Adjustment: Inferences from the Gap Russell Cooper and Jonathan Willis NBER Working Paper No

The Cost of Labor Adjustment: Inferences from the GapRussell Cooper and Jonathan WillisNBER Working Paper No. 10006September 2003JEL No. J23, E24

ABSTRACT

We study labor adjustment costs. We specify a dynamic optimization problem at the plant-level,

allowing for both convex and non-convex adjustment costs. We estimate the parameters of the

adjustment process using an indirect inference procedure in which simulated moments are matched

with data moments. For this study we use estimates of reduced-form adjustment functions obtained

by the “gap methodology” reported in Caballero-Engel as data moments. Contrary to evidence at

the micro level in support of non-convex adjustment costs, our findings indicate that piecewise

quadratic adjustment costs are sufficient to match these aggregate moments.

Russell W. CooperDepartment of EconomicsUniversity of TexasAustin, TX 78712and [email protected]

Jonathan WillisResearch Department Federal Reserve Bank of Kansas City925 Grand BoulevardKansas City, MO [email protected]

Page 3: NBER WORKING PAPER SERIES THE COST OF LABOR … · 2020. 3. 20. · The Cost ofLabor Adjustment: Inferences from the Gap Russell Cooper and Jonathan Willis NBER Working Paper No

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