Chapter 9 Dynamic models of labour demand

The chapter presents a discussion on the dynamic models of labor demand. A firm does not hire its workforce afresh each day for the reason that it is cheaper not to do so. Hiring and firing generate costs for the firm over and above the weekly wage payment. As it is discussed, these costs ensure that the firm's demand for labor depends not only on current exogenous factors but also on the initial size of the workforce and expectations about the future levels of such factors. The firm's demand for labor cannot be described by a static model. The chapter examines the theoretical explanations of facts and investigates the extent to which these explanations are consistent with empirical data. The chapter discusses the size and structure of the adjustment costs imposed on the firm by turnover. This is an important issue because the structure of these costs is crucial in determining the temporal pattern of labor demand in response to exogenous shocks. This is followed by analyses of a number of dynamic models of the demand for labor. The chapter also discusses the formulation of empirical models and presents some of the limited amount of empirical work, which is explicitly based on a formulated dynamic theory. The chapter concludes with some general remarks on the directions in which research in this area might proceed.