Fixed Costs, Employment and Labour Demand over the Cycle

Bibliographic Data

ID9727144
AuthorsS J Nickell (corresponding author)
Year1978
Volume45
Issue180
Pages329
Publication date1978-11-01
Peer ReviewedYes
Open AccessNo
TypeARTICLE
VenueEconomica (JOURNAL)
Journal identifiersISSN: 0013-0427 • E-ISSN: 1468-0335
PublisherJSTOR (PUBLISHER)
DOI10.2307/2553449
OpenAlexW1981721849
LanguageEN
Citations received18
References cited2

In any decentralized economy the vast majority of firms are faced with considerable variation in the demand for their output. There are many methods of dealing with such variation; for example, firms can vary the price of output, the level of inventories or the level of production. If this last course is chosen, there will have to be changes in the level of employment of factors of production, in particular, variations in the number of employees, the hours that they work, the amount of capital and the number of hours of the week for which it is operated. The changes that the firm actually chooses to make will, of course, depend on the technology of production and the prices of the factors. In addition, however, the firm must take note of the costs that are associated with the changes themselves. For example, increases in working hours for existing employees may be very cheap to bring into operation, whereas the costs attendant on hiring a new employee may be considerable and that of rapidly installing a new production line probably prohibitive. Since we shall be concentrating on labour demand it is worth examining the particular costs associated with the engagement or disengagement of workers. On the hiring side there are the costs of finding and screening new employees as well as the costs incurred in the form of lost production while they are settling into their new jobs. Firing costs may include redundancy payments, costs imposed by trade unions opposed to the laying off of workers, and the legal and other difficulties caused by employment protection legislation.' One point worth noting is that there seems little reason to suppose costs per worker associated with either hiring or firing increase with the rate at which employees flow in or out. Indeed, given the large fixed costs associated with personnel and legal departments, it may even be more reasonable to suppose that the average cost of adjusting the workforce diminishes rather than increases with the speed of adjustment.2 These costs of changing the workforce are a crucial element in determining the structure of the demand for labour in response to variations in the demand for output. This is the general question to which this paper is addressed and in what follows we hope to elucidate certain aspects of it by doing two things. First, we shall construct a model to explain the firm's demand for labour when it is facing expected cyclical variations in the demand for its product. The reason why such a model is required is that the majority of existing dynamic models of factor demand simply analyse the optimal adjustment of the firm towards a static equilibrium and it is very difficult to deduce from

Business · Capital (architecture) · Economics · Fixed cost · Industrial organization · Labour economics · Microeconomics · Payment · Production (economics) · Variable cost · Work (physics) · Finance · Labor market dynamics and wage inequality · Merger and Competition Analysis · Politics, Economics, and Education Policy

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