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Title:Frictions and the joint behavior of hiring and investment PDF Logo
Authors:Yashiv, Eran
Issue Date:2012
Series/Report no.:Discussion Paper series, Forschungsinstitut zur Zukunft der Arbeit 6636
Abstract:The decisions of firms on investment and hiring play a crucial role in business cycle fluctuations. This paper explores their dynamic behavior in the presence of frictions. It does so within a unified framework, stressing their mutual dependence and placing the emphasis on their joint, forward-looking behavior. Using estimation of aggregate, private sector U.S. data, it shows that the model with frictions is able to fit the data. A key element is the interaction of hiring and investment costs. It is significant and negatively signed, implying complementarity between investment and hiring. There is a substantial role for aggregate labor market conditions in hiring costs, whereby the latter are lower in good times. The fit of the investment part of the model is poor if hiring is left out completely or is introduced without the interaction between the two. The results capture the not so-well known fact whereby there is negative co-movement of gross investment and gross hiring, the former being pro-cyclical while the latter is counter-cyclical. This is so as they follow the cyclical behavior of their respective present values. The relevant intertemporal considerations are highlighted. An asset-pricing type empirical analysis of the estimation results indicates that the hiring rate depends mostly on future labor profitability while the investment rate depends mostly on future returns.
Subjects:gross investment
gross hiring
frictions
business cycles
present values of hiring and investment
forward-looking behavior
production-based asset pricing
complementarities
labor market conditions
JEL:E24
J23
J63
J64
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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