Dynamics of labor demand: Evidence from plant-level observations and aggregate implications

•This paper studies the dynamics of labor demand at the plant level to quantify labor adjustment costs.•We specify and estimate the parameters of a plant-level dynamic optimization problem using simulated method of moments to match plant-level observations.•Our findings indicate that non-convex adjustment costs are critical for explaining plant-level observations on hours and employment.

This paper studies the dynamics of labor demand at the plant level to quantify labor adjustment costs. At the plant level, in contrast to time-series observations, the correlation of hours and employment growth is negative while hours and employment growth are about equally volatile. We specify and estimate the parameters of a plant-level dynamic optimization problem using simulated method of moments to match these plant-level observations. Our findings indicate that non-convex adjustment costs are critical for explaining plant-level observations on hours and employment adjustment.