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Labor Adjustment Costs in a Panel of Establishments: A Structural Approach
C33 - Models with Panel Data
C41 - Duration Analysis
E24 - Employment; Unemployment; Wages
J23 - Employment Determination; Job Creation; Demand for Labor; Self-Employment
This paper estimates a structural model of the employment decision of the firm. Our establishment level data displays an extreme degree of rigidity in that employment levels are largely constant throughout our sample. This can be due to the fact that establishments face large shocks but also large adjustment costs, or alternatively that they incur no adjustment costs but that shocks are negligible. Given our identifying assumptions, we find that rigidity is due to adjustment costs and not to the shock process. We further find that these costs reduce the value of the firm as much as 5%. Finally, small fixed costs of adjustment have a large impact on entry and exit job flows.