The Influence of Adjustment Costs on Labour Adjustment: An Analysis Using Panel Data for Manufacturing Establishments in Lower Saxony

In neoclassical theory labour demand responds to external shocks without delay by returning to the optimum (see Hamermesh 1993, 20--28), but in general, enterprises change their demand for labour more slowly than shocks warrant, because each firm incurs adjustment costs when it changes the amount of employees (see Hamermesh/Pfann 1996, 1264). During the last several years a number of studies have investigated the costs of adjustment, the structure of adjustment costs and the influence of these costs on labour demand. Most of these studies used aggregate data at the level of industries, while micro data based studies remain rare. One problem for empirical studies at the firm level is the lack of panel data with a large number of cases and high quality of data. The following analysis of the influence of adjustment costs on labour adjustment is based on the Hannover Firm Panel, a new data set that is a representative panel covering some 1000 manufacturing firms from Lower Saxony, one of the German Federal States. This data set has information, inter alia, for an investigation of internal factors which influence labour adjustment.