Brazilian Review of Econometrics V 29, N 2, P 251-284, 2009
Gustavo Gonzaga.
In this paper, we investigate the dynamics of labor adjustment at the rm level in
Brazilian manufacturing, using information on average hours per worker to measure
employment deviation from desired levels as in Caballero et al. (1997). We use Brazilian
manufacturing data at the establishment level and monthly frequency. The objective is
to estimate the employment adjustment function, which relates the magnitude of em-
ployment changes to the size of employment gaps. The empirical results point to the
presence of nonconvexities in employment adjustment costs in Brazilian manufacturing,
with estimated employment adjustment rates increasing with the size of employment
gaps. On average, employment adjustment rates range from 10% for small employment
gaps to 35% for large ones. The results also show that there is a large proportion of
rms in the sample that do not adjust employment over two consecutive periods. We
run several robustness tests with alternative ways of estimating the employment gaps,
using other forms of dealing with measurement error and a problem of endogeneity of the
hours change variable. Although the magnitudes of employment adjustment rates vary,
we show that: i) the variations are in line with the expected directions of the biases in
estimating the coecient of the hours change variable; and ii) the format of employment
adjustment functions does not change across speci cations, always revealing that employ-
ment adjustment rates increase with the size of employment gaps, which is compatible
with nonconvex costs of employment adjustment. We also study how the employment
adjustment function varies according to several establishment characteristics, such as
skilled-labor intensity, size, payroll expenses, and overtime payments. We show that the
employment adjustment function tends to have a higher mean and to display larger val-
ues when measured for establishments with characteristics that are arguably related to
lower costs of employment adjustment: larger proportion of low-skilled workers, smaller
size and lower overtime payments.
