Employment adjustment in German firms

Abstract

Using a representative establishment data set for Germany, I show that, in line with the existing literature for several countries, firms' adjustment costs for employment are characterized by a fixed and convex functional form. Furthermore, they are asymmetric with dismissal costs exceeding hiring costs. An analysis of firms' adjustment in the period 1996 - 2010 also indicates that adjustment behavior has changed over time. Comparing the employment adjustment in the two observed business cycles comprising the years 1996 - 2003 and 2004 - 2010, I find that the adjustment speed was higher in the second business cycle indicating that adjustment costs have fallen in recent years.