MONOPOLISTIC COMPETITION, COSTS OF ADJUSTMENT, AND THE BEHAVIOR OF EUROPEAN MANUFACTURING EMPLOYMENT

A dynamic model of employment under monopolistic competition is derived and estimated with manufacturing data from European countries and the U.S. While there is only weak evidence of higher quadratic adjustment costs in Europe at annual sampling frequencies, imputed labor charges and the linear component of hiring and firing costs are significantly estimated with magnitudes consistent with EC survey evidence. Evidence of monopolistically competitive behavior is found only in the larger European economies. The pattern of rejection of the model's overidentifying restrictions and the covarience of estimated residuals are consistent with the absence of operative quantity constraints on firms. © 1991.