published in: Journal of Monetary Economics, 2005, 52 (3), 575-600
The purpose of this paper is to develop a model that integrates inventory and labor decisions.
We extend a model of inventory behavior to include a detailed specification of the role of
labor input in the production process and of the costs associated with it. In particular, we
distinguish between employment, hours and effort per worker, and allow for adjustment costs
associated with employment changes. We assume that the requirement function for effective
hours has a general trans-logarithmic form, and derive an estimable system of Euler
equations for inventories and employment with implied cross-equation restrictions. The
econometric results shed light on several important topics, including the shape of the
marginal cost of output and the role of labor hoarding as an explanation of procyclical
productivity and the persistence of inventory stocks. Moreover, they raise questions about the
adequacy of commonly used specifications such as Cobb-Douglas approximations to the
production process and the definition of labor input as the product of employment and
effective hours worked per worker.
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