The Joint Dynamics of Capital and Employment at the Plant Level
By Ryan Michaels, William Hawkins, and Jiyoon Oh
Abstract:
This paper studies the join dynamics of plant-level capital and labor adjustment using data from the Korean manufacturing sector. It highlights an under-appreciated fact: investment and reductions in employment frequently occur together. Employment declines occur in 36 percent of plant-year observations in which the investment rate exceeds 10 percent. These episodes have macroeconomic significance: they account for 35.5 percent of total capital accumulation. Viewed through the lens of a canonical model of plant-level dynamics in which factors are complements in production, these data are not easy to rationalize. They can be understood, however, within a more general framework in which capital can directly replace labor in certain tasks. This framework captures the intuitive notion that the elasticity of substitution between capital and labor should be higher in the long run than in the short run. The paper estimates this model and assesses it implications both in and out of sample.
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