Profit Margins,Adjustment Costs and the Business Cycle: An Application to Spanish Manufacturing Firms*

The objective of this paper is to investigate the cyclical behaviour of mark‐ups, using a panel of Spanish manufacturing firms over the period 1990–1998. Margins are estimated from the optimal conditions derived from the firm's optimisation problem, which assumes that labour inputs are subject to adjustment costs. A number of results emerge from the estimations. First, we find positive and asymmetric adjustment costs for permanent labour inputs. Second, price‐cost margins are markedly procyclical. Our estimates suggest that labour adjustment costs more than double the variability of average margins with respect to Lerner indexes. Third, we find differences in the parameters of the adjustment technology across industries which make markups of intermediate and production good industries more cyclical than consumer good industries. Finally, industry‐specific price‐cost margins are higher in more concentrated industries.     

Labour Demand Adjustment: Does Foreign Ownership Matter?

This paper examines whether multinationals differ in their employment adjustment from domestic companies, using a panel of 5,544 Belgian firms observed between 1998 and 2005. More precisely, we estimate labour adjustment costs by worker and firm types. We propose a new flexible specification that takes into account the role of firm size in adjustment costs. Our results indicate that adjusting white‐collar employment is around half as costly for multinational firms (MNFs) as for domestic firms of the same size. The remaining differential in adjustment costs between MNFs and domestic firms might result, among other things, from multinationals' stronger bargaining power.     

Labour Demand,Flexible Contracts and Financial Factors: Firm‐Level Evidence from Spain*

We estimate models of labour demand for a panel of 3,400 Spanish manufacturing firms over the period 1985–2001. We examine the roles of fixed‐term contracts, financial factors and a policy reform in 1997 affecting permanent contracts by lowering payroll taxes and dismissal costs. Compared with permanent employment, the demand for flexible labour displays: (i) greater sensitivity to financial factors; (ii) greater cyclical sensitivity; (iii) a larger average wage elasticity; and (iv) less inertia. Our analysis of the 1997 policy reform suggests that a 5 percentage point reduction in the payroll tax is associated with an 8% increase in permanent labour demand.     

Statutory firing costs and lay-offs in Canada

Firing costs may deter firms from engaging in both lay-offs and temporary hiring. While the net response of average employment to firing costs is ambiguous, lay-offs will be reduced through both channels and their frequency therefore will unambiguously decline. This paper estimates the effect of Canadian advance notice and severance laws on individual permanent lay-off hazards. Individual notice laws are found to reduce the lay-off hazard, particularly among non-professional, non-union workers, but the effect is small. Neither group notice nor severance laws are statistically significant. These laws do not appear to substantially affect adjustment in the Canadian labour market.     

Price adjustment and market structure: A single-industry study

The administered price hypothesis of Gardnier Means has continued to attract a great deal of empirical attention. Unfortunately, the results of all this research have not been consistent. The present paper tries to circumvent the usual empirical difficulties by using a lagged adjustment model for a single industry with geographically separate markets. It examines the rate of price adjustment and the frequency of price changes for newspaper advertising rates for a sample of local papers in Ireland. Adjustment equations are run for each newspaper using labour and materials cost indices as explanatory variables. The partial adjustment coefficient estimates are then related to market structure and firm specific characteristics.     

How do European firms adjust their labour costs when nominal wages are rigid?

Although workers' nominal wages are seldom cut, firms have multiple options available if they require adjustments in their wage bills. We broaden the analysis of relative (in)flexibility in labour costs by investigating the use of other margins of labour cost adjustment at the firm level beyond base wages. Using data from a unique survey, we find that European firms make extensive use of other components of compensation to adjust the cost of labour. Interestingly, firms facing base wage rigidity are more likely to use alternative margins of labour cost adjustment; therefore there appears to be some degree of substitutability between wage flexibility and the flexibility of other cost components. Changes in bonuses and non-pay benefits are some of the potential margins firms use to reduce costs. We also show how the margins of adjustment chosen are affected by unionisation and firm and worker characteristics.     

Skill shortages and firms' employment behaviour

This study investigates the effects of skill shortages on the dynamics of employment at the firm level for UK manufacturing between 1984–94. We find that shortages of skilled labour have a statistically significant effect on firms' employment behaviour. It has a positive effect on firms' adjustment costs leading to employment being more sluggish to respond when the labour market is tight, implying that employment adjustment will be more responsive in the downward direction. This result is robust to the inclusion of a measure of firms' sales expectations, with the effect of skill shortages being greater in periods when firms expect sales to rise.     

Short-run labor productivity in a dynamic model

A classic empirical finding is that the short-run output elasticity of demand is smaller than unity and is less than in the long run. This phenomenon is called ‘short-run increasing returns to labor’ (SRIRL). In this paper we analyze SRIRL using a dynamic factor demand model for variable and quasi-fixed inputs, where the latter incur increasing marginal internal adjustment costs. Speeds of adjustment of quasi-fixed inputs are endogenous and variable, not constant parameters. Labor hoarding is shown to be neither necessary nor sufficient for SRIRL. These results are illustrated empirically using annual U.S. manufacturing data, 1952-71.     

Factor Utilization and Adjusted Productivity Estimates for the UK*

This paper derives series for capital utilization, labour effort and total factor productivity (TFP) for the UK from a general equilibrium model with variable utilization and labour adjustment costs. Capital utilization tracks survey‐based measures closely, but persistent movements in total hours worked mean our labour effort series is not as highly correlated with its comparators. Our estimated TFP series is less cyclical than the traditional Solow residual, although a weighted average of capital utilization and labour effort – aggregate factor utilization – and the Solow residual are not closely related.     

Measuring technical and allocative inefficiency in the translog cost system: a Bayesian approach

In this paper, we propose simulation-based Bayesian inference procedures in a cost system that includes the cost function and the cost share equations augmented to accommodate technical and allocative inefficiency. Markov chain Monte Carlo techniques are proposed and implemented for Bayesian inferences on costs of technical and allocative inefficiency, input price distortions and over- (under-) use of inputs. We show how to estimate a well-specified translog system (in which the error terms in the cost and cost share equations are internally consistent) in a random effects framework. The new methods are illustrated using panel data on U.S. commercial banks.     

Ageing and employability. Evidence from Belgian firm-level data

The Belgian population is ageing due to demographic changes, so does the workforce of firms active in the country. Such a trend is likely to remain for the foreseeable future. And it will be reinforced by the willingness of public authorities to expand employment among individuals aged 50 or more. But are older workers employable? The answer depends to a large extent on the gap between older workers’ productivity and their cost to employers. To address this question we use a production function that is modified to reflect the heterogeneity of labour with workers of different age potentially diverging in terms of marginal products. Using unique firm-level panel data we produce robust evidence on the causal effect of ageing on productivity (value added) and labour costs. We take advantage of the panel structure of data and resort to first-differences to deal with a potential time-invariant heterogeneity bias. Moreover, inspired by recent developments in the production function estimation literature, we also address the risk of simultaneity bias (endogeneity of firm’s age-mix choices in the short run) using (1) the structural approach suggested by Ackerberg et al. Structural identification of production functions. Department of Economics, UCLA, (2006), (2) alongside more traditional system-GMM methods (Blundell and Bond in J Econom 87:115–143, 1998) where lagged values of labour inputs are used as instruments. Our results indicate a negative impact of larger shares of older workers on productivity that is not compensated by lower labour costs, resulting in a lower productivity-labour costs gap. An increment of 10 %-points of their share causes a 1.3–2.8 % contraction of this gap. We conduct several robustness checks that largely confirm this result. This is not good news for older individuals’ employability and calls for interventions in the Belgian private economy aimed at combating the decline of productivity with age and/or better adapting labour costs to age-productivity profiles.     

The specification and estimation of interrelated factor demands under uncertainty

This paper studies a model of the firm's interrelated demands for the factors of production incorporating exogenous variables with uncertain future values, multiple quasi-fixed factors, depreciation in use, and non-symmetric internal costs of adjustment. The inputs considered are production labor, non-production workers, capital, inventories of non-finished goods, and capacity and non-production worker utilization rates. A simultaneous system of factor demand equations with constraints is estimated and using U.S. manufacturing data. The model is shown to be tractable under certain assumptions. The results are encouraging given the complexity and the nature of the model.     

Labour adjustment costs: Estimation of a dynamic discrete choice model using panel data for Greek manufacturing firms

In this paper we estimate a dynamic structural model of employment at firm level. Our dataset consists of a balanced panel of 2790 Greek manufacturing firms. The empirical evidence of this dataset stresses three important stylized facts: (a) there are periods in which firms decide not to change their labour input, (b) there are periods of large employment changes (lumpy nature of labour adjustment) and (c) the commonality is employment spikes to be followed by smooth and low employment growth periods. Following Cooper and Haltiwanger [Cooper, R.W. and Haltiwanger, J. “On the Nature of Capital Adjustment Costs”, Review of Economic Studies, 2006; 73(3); 611–633], we consider a dynamic discrete choice model of a general specification of adjustment costs including convex, non-convex and “disruption of production” components. We use a method of simulated moments procedure to estimate the structural parameters. Our results indicate considerable fixed costs in the Greek employment adjustment.     

The rhetoric and reality: employer responses to the national minimum wage

The national minimum wage (NMW) was introduced to Britain in April 1999 amid much speculation. This paper considers the political reasons for introducing the NMW and the economic effects of doing so. It also addresses the issue of the additional costs created by the NMW and the strategies adopted by employers to defray them. The paper provides evidence from the hotel sector that suggests some wage gains but no significant disemployment effects. The value of conventional labour market models as predictive tools is questioned.     

The Labour Market Effects of Increases in Social Insurance Premium: Evidence from Japan

Exploiting heterogeneous variations in labour cost increases due to Japan's 2003 social insurance premium reform as a natural experiment, we estimate the impacts of the increased social insurance premiums on employment, working hours and payroll costs. Using the difference‐in‐differences method with establishment fixed effects, we find that firms reduce the number of employees and increase average annual earnings from longer working hours in response to an exogenous increase in labour costs without productivity gains. Firms manage to pay for this increase in the average wage paid to the remaining workers by reducing the number of employees to keep total payroll costs unchanged. In contrast, since social insurance premiums are shared equally between employees and employers, firms pay the remaining half premiums that they are imposed with. Sub‐sample analyses show that firms adhering to a labour hoarding policy did fire many workers taking advantage of the 2003 reform. This may indicate that the reform provided a good excuse to cut employment in firms that had been forced to comply with a labour hoarding policy even in an over‐employment situation, which is more likely in sectors and countries where dismissals are rigorously regulated.     

Wage and price adjustment in a multimarket disequilibrium model

The estimation of wage and price adjustment equations rests heavily on the use of tension variables that aim at capturing the disequilibria in the labour and goods markets. Disequilibrium models therefore provide a natural way of endogenizing these tension variables. This paper estimates jointly a two-market disequilibrium model and a wage and price adjustment block where price and wage growth react to excess effective demands. The estimation is carried out using the simulated pseudo-maximum-likelihood methods developed by Laroque and Salaniè (1989); the results look promising as regards the estimation of even more sophisticated models.     

Employers' hiring practices,employment protection,and costly search: A vacancy-level analysis

An employer with a vacancy may respond to high search costs by lowering hiring requirements. While such an adjustment increases the employer's chances of filling the vacancy, it also more likely results in a match that terminates when the match is hit by match-specific productivity shocks. Drawing on a novel Slovenian vacancy dataset, we find that employers who are searching to fill temporary positions are more likely to hire underqualified workers when search costs are high. We find that search costs are taken into consideration when employers are searching to fill permanent positions in some specifications but not all. These findings suggest that for employers who are searching to fill a permanent position, the benefits of lowering hiring requirements when search costs are high are likely outweighed by: a) high firing costs if an under-qualified worker is hired on a permanent contract or b) the costs of undertaking a new search later if an under-qualified worker is hired on a temporary contract. These are novel findings about the employers' hiring practices in the presence of employment protection laws and costly search.     

Land Market Restrictions,Women's Labour Force Participation and Wages in a Rural Economy

We analyse the effects of land market restrictions on the rural labour market outcomes for women. The existing literature emphasizes two mechanisms through which land restrictions can affect economic outcomes: collateral value of land, and (in)security of property rights. Our analysis focuses on an alternative mechanism where land restrictions increase costs of migration out of villages. Testable prediction of collateral channel is that wages remain unchanged, but the effects on labour force participation are ambiguous. Insecurity of property rights in land reduces labour force participation, but leaves wages undisturbed. In contrast, if land restrictions work primarily through higher migration costs, labour force participation increases, while wages decline. For identification, we exploit a natural experiment in Sri Lanka where historical malaria played a unique role in land policy. We provide robust evidence of a positive effect of land restrictions on women's labour force participation, but a negative effect on female wages. The empirical results thus contradict a collateral or insecure property rights effect, but supports migration costs as the primary mechanism.     

Reviewing the literature on non-parametric dynamic efficiency measurement: state-of-the-art

Much of the literature on static efficiency measurement models assumes that the inputs are fully used for producing outputs in the same period, with the result that no time interdependence exists between the input utilization and output realizations for a production unit in consecutive periods. A review of the literature on non-parametric dynamic efficiency models identifies five key factors of the inter-temporal dependence between input and output levels over different periods: (i) production delays; (ii) inventories (inventories of exogenous inputs or inventories of intermediate and final products); (iii) capital or generally quasi-fixed factors (and associated embodied technological change, vintage specific capital); (iv) adjustment costs; and (v) incremental improvement and learning models (disembodied technological change). This paper reviews the literature and finds that the dynamic issues associated with adjustment costs and capital have received considerable attention in the literature, whereas the dynamic issues associated with inventories have received less attention. The paper concludes with suggestions for future research such as relaxing the perfect anticipation/knowledge assumption for future variables, prices, and states. Moreover, Dynamic Network Data Envelopment Analysis has provided a unifying framework for some dynamic factors, but further development of these models is necessary including meaningful applications.     

Assessing the Empirical Relevance of Labour Frictions to Business Cycle Fluctuations

This paper describes a dynamic stochastic general equilibrium model augmented with labour frictions, namely: indivisible labour, predetermined employment and adjustment costs. This improves the fit to the data as shown by a higher log marginal likelihood and closer match to key business cycle statistics. The labour frictions introduced are relevant for model dynamics and economic policy: the effect of total factor productivity shocks on most macroeconomic variables is substantially mitigated; fiscal policy leads to a greater crowding out of private sector activity and monetary policy has a lower impact on output. Labour frictions also provide a better match to impulse response functions from vector autoregressive models.