LABOR ADJUSTMENT DYNAMICS: AN APPLICATION OF SYSTEM GMM

This paper analyzes the dynamics of the Portuguese labor market using micro data: implications of adjustment costs to input factor adjustment throughout the business cycle are discussed; the current situation of the Portuguese labor market is reviewed; and measures of speed of adjustment for different types of labor (namely, the number of workers and the number of hours employed by firms) are obtained using a System GMM estimator and compared to those obtained for other countries. Additionally, we provide the median adjustment lag and short- and long-run labor demand elasticities with respect to firms' wages and sales. We conclude that the Portuguese labor market is slow in adjustment relative to other countries, while there is no evidence to support the claim that adjustment through the number of hours employed is faster than the adjustment through the number of workers employed.