Factor Utilization and Margins for Adjusting Output : Evidence from Manufacturing Plants

In this paper we describe patterns of factor utilization and output adjustment at the plant level. A burgeoning literature emphasizes that the dynamics of aggregate economic activity are determined by the interaction of heterogeneous agents who face differing costs of adjusting to aggregate demand shocks. If these costs are of the lump-sum variety, infrequent, but large actions will be preferable to continuous reactions, at least along some margins available for adjusting output. Extant empirical work points to a variety of margins where adjustment appears lumpy, including investment in physical capital and changes in employment. At given stocks of the primary factors, output also can be varied through altering the momentary intensity or the work periods of labor and capital. For an individual manufacturing plant, the relevant adjustment margins tend to be hierarchical in the sense that, say, investments in physical capital or a shift of new employees are undertaken only for large, sustained increases in demand, whereas work period margins such as the number of days-per-week a plant operates tend to be used for smaller, shorter-run adjustments. We show that plants differ quite a bit in how they accomplish adjustments, depending largely on the shut-down cost aspect of technology; other things equal, assembly-type operations with low shut-down costs primarily vary the work period of the plant, whereas continuous processing plants adjust instantaneous flow rates of production. For larger output increases, a lengthening of the work period by assemblers entails employment changes, whereas continuous processors are apt to relax physical capital constraints. The implications of a demand shock for aggregate employment or investment depend on the relative importance of assembly versus continuous-processing technologies. Empirically, we use micro survey data on the organization of actual and capacity plant operations to identify and describe the hierarchies of adjustment. We also discuss the power of technology groupings along these lines for explaining which plants adjust the most to common demand shocks