Demand Shocks and Labor Hoarding: Matching Micro Data
In Swedish firm-level data, output is more volatile than employment, and in response to demand shocks, employment follows output with a one- to two-year lag. To explain these observations, we use a model with labor hoarding in which firms can change production by changing the utilization rate of their employees. Matching the impulse response functions, we find that labor hoarding in combination with increasing returns to scale in production and a very high price stickiness can explain the empirical pattern very well. Increasing returns to scale implies a larger percentage change in output than in employment. Price stickiness amplifies volatility in output because the price has a dampening effect on demand changes. Both of these explain the delayed reaction in employment in response to output changes.
Mickelsson, G., & Stadin, K. (2016). Demand Shocks and Labor Hoarding: Matching Micro Data. In G. Mickelsson DSGE Model Estimation and Labor Market Dynamics (Doctoral dissertation). Economic Studies 163. Department of Economics, Uppsala University.