Employment Adjustment and Labor Utilization

Abstract

Standard models that formalize and assess the impact of labor adjustment costs on labor demand suppose that firms can only change the size of their workforce (the extensive margin) and not the number of hours of their existing employees (the intensive margin). I relax this assumption and propose a dynamic general equilibrium model that introduces labor adjustment on both intensive and extensive margins. I calibrate the model to a matched employer-employee panel of Danish firms. I then simulate two labor market policies aimed at promoting job creation: an introduction of hiring subsidies and a reduction in the official workweek.