Asymmetric Adjustment Costs in Non-linear Labour Demand Models for the Netherlands and U.K. Manufacturing Sectors.

The costs of hiring a worker generally differ in size from the firing costs. This article investigates optimal labor demand schedules for production and nonproduction workers of firms that operate under uncertainty and face asymmetric costs of adjusting their workforce. Generalized methods of moments estimates of the structural parameters of the Euler conditions for production and nonproduction workers are presented using time-series data of the Netherlands and U.K. manufacturing sectors. The authors find that asymmetric adjustment costs play an important role in the explanation of unbalanced labor demand between upward and downward movements of the business cycle. Copyright 1993 by The Review of Economic Studies Limited.