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THE INTENSIVE MARGIN PUZZLE AND LABOR MARKET ADJUSTMENT COSTS

Published online by Cambridge University Press:  28 September 2015

Dennis Wesselbaum
Dennis Wesselbaum*
Affiliation:
University of Hamburg, German Physical Society, IfW Kiel and EABCN
*
Address correspondence to: Dennis Wesselbaum, Methods in Economics, Department of Economics, University of Hamburg, Von-Melle Park 5, 20146 Hamburg, Germany; e-mail: [email protected].
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Abstract

This paper documents a puzzling fact, namely that there is a significant negative relation between employment protection legislation and the usage of the intensive margin of labor market adjustments. I make use of a real business cycle model and introduce search and matching frictions as well as adjustment costs along the extensive and the intensive labor market margins. I show that the model is able to replicate the observed patterns of cyclicality, volatility, and especially the behavior of extensive and intensive margins if we assume low firing costs and relatively high hours adjustment costs.

Keywords

Adjustment CostsExtensive MarginIntensive Margin
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1458 - 1476
Copyright
Copyright © Cambridge University Press 2015 

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References

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