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Heterogeneous adjustment of employment and capital after factor market deregulation

Eslava, Marcela, Haltiwanger, John, Kugler, Adriana and Kugler, Maurice (2005) Heterogeneous adjustment of employment and capital after factor market deregulation Mimeo

Record type: Monograph (Project Report)

Abstract

In this paper, we analyze employment and capital adjustments using a panel of plants from Colombia. We allow for nonlinear adjustment of employment to reflect not only adjustment costs of labor but also adjustment costs of capital, and vice-versa. Using data from the Annual Manufacturing Survey, which include plant-level prices, we generate measures of plant-level productivity, demand shocks, and cost shocks, and use them to measure desired factor levels. We then estimate adjustment functions for capital and labor as a function of the gap between desired and actual factor levels. As in other countries, we find non-linear adjustments in employment and capital in response to market fundamentals. In addition, we find that employment and capital adjustments reinforce each other, in that capital shortages reduce hiring and labor shortages reduce investment. Moreover, we find that the market oriented reforms introduced in Colombia after 1990 increased employment adjustments, especially on the job destruction margin, while reducing capital adjustments. Finally, we find that while completely eliminating frictions from factor adjustments would yield a dramatic increase in aggregate productivity through improved allocative efficiency, the reforms introduced in Colombia generated only modest improvements.

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More information

Published date: 2005
Keywords: joint factor adjustment, irreversibilities, adjustment costs, input reallocation, deregulation

Identifiers

Local EPrints ID: 34581
URI: http://eprints.soton.ac.uk/id/eprint/34581
PURE UUID: dabe7094-fb20-41dd-9119-ea366d7c1086

Catalogue record

Date deposited: 16 May 2006
Last modified: 17 Jul 2017 15:50

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Contributors

Author: Marcela Eslava
Author: John Haltiwanger
Author: Adriana Kugler
Author: Maurice Kugler

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