Revisiting the labor hoarding employment demand model: an economic order quantity approach

The labor studies literature has for many years accepted the labor hoarding theory. That theory derives from seminal work by Oi (1962), Solow (1964), Miller (1971), and Fair (1985). Those studies argue that as a result of the absolute cost of hiring and training certain workers that even when the economy turns down, firms avoid layoffs as would be expected in a neoclassical framework. Consequently during such time periods companies develop a reserve supply of workers. If labor hoarding occurs the employment cycle should be less extreme than the production cycle. From December 2007 when there were 115.5 million employed workers, the American economy lost 8.5 million jobs by January 2010, a 7.35% reduction in employment. During the same period, real GDP fell by 1.25%. This paper presents a different view of the demand for labor that is based on Baumol’s (1952) cost minimization paradigm for determining the optimal level of inventories. In the framework, the stock of employees is built up beyond the current need level in good times to minimize hiring costs but during periods of slack demand by consumers the number of excess workers is reduced. This alternative model appears to fit the current changes in unemployment and GDP better than the labor hoarding theory.