Estimating Labor Demand with Fixed Costs

We consider a dynamic model in which firms decide whether or not to vary labor in the presence of fixed costs. By exploiting the first-order condition for optimality, we derive a semireduced form in which firms' intertemporal employment is defined by a standard marginal productivity condition augmented by a forward-looking term. We obtain a marginal productivity equilibrium relation that takes into account the future alternatives of adjustment or nonadjustment that firms face. We use the structural parameter from this condition to estimate the fixed cost within a discrete decision process. Fixed costs are about 15 months' labor cost. Copyright 2004 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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