Labor Adjustment under Rational Expectations.
CENTER FOR NAVAL ANALYSES ALEXANDRIA VA
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This paper is an application of the theory of rational expectations to demand for labor in 11 two-digit industries. There were several specific goals 1 to test the hypothesis that firms, to some extent, look past cyclical changes in determining their demand for output 2 to try to explain the estimated finding of increasing returns to scale implied by most labor demand models 3 to illustrate how the assumption of rational expectations is useful in distinguishing speeds of adjustment to different sources of output change--in our case, between cyclical changes and imports 4 to make an explicit comparison with a model which assumes that expectations are static, i.e., the usual partial adjustment model. We find that in most of the industries, firms do take account of the future in their demand for labor. Taking account of the future lowers the estimated returns to scale. We find, too, that speeds of adjustment differ by the source of output change and that the expectations model has statistical properties superior to the static model. Author
- Economics and Cost Analysis
- Personnel Management and Labor Relations