Labour Demand and the Source of Adjustment Costs

To examine the importance of the two sources of costs of adjusting labour demand, net costs (of adjusting employment) and gross costs (of hiring and firing), I collect new sets of short monthly time series, from a medium-size hospital and three manufacturing plants. Models with quadratic costs and with lumpy costs are developed and yield lower bounds on the fraction of adjustment costs that are gross. The estimates demonstrate that both types of costs affect dynamic labour demand, but that gross adjustment costs especially, and the turnover that generates them, deserve much more attention.