Adjustment Costs in Factor Demand

This study discusses the nature of adjustment costs, which underpin the dynamic theory of input demand. We examine the implications of the conventional assumption that they are quadratic-symmetric. A recent rapidly-growing literature based on microeconomic data shows that this assumption is inferior to many alternatives. We demonstrate the importance of this new knowledge for predicting macroeconomic fluctuations in employment and investment. We indicate its relevance for constructing general equilibrium simulation models, drawing inferences about the likely impacts of labour market and investment policies, and analysing firms’ dynamic behaviour in factor markets.