This study examines what one can infer from aggregate time-series of
employment under the assumption that adjustment at the micro level is discrete
because of lumpy adjustment costs. The research uses various sets of quarterly
and monthly data for the United States and imposes assumptions about how
sectoral dispersion in output shocks affects adjustment through aggregation. I
find no consistent evidence of any effect of sectoral shocks on the path of
aggregate employment.
I generate artificial aggregate time series from microeconomic processes
in which firms adjust employment discretely. They produce the same inferences
as the actual data. Standard methods of estimating equations describing the
time path of aggregate employment yield inferences about differences in the
size of adjustment costs that are incorrect and inconsistent with the true
differences at the micro level. This simulation suggests that the large
literature on employment dynamics based on industry or macro data cannot inform
us about the size of adjustment costs, and that such data cannot yield useful
information on variations in adjustment costs over time or among countries.
*Published:
Carnegie-Rochester Conference Series on Public Policy, Vol. 33, pp. 93-129, (Autumn 1990).
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