NONLINEAR DYNAMICS IN A STRUCTURAL MODEL OF EMPLOYMENT

Search and matching models imply that firms' employment adjustment costs depend on the tightness of the labour market, giving rise to endogenous or nonlinear dynamics in employment. This paper sets this argument out in detail, estimating a model simultaneously explaining the long-run level of employment and the nonlinear dynamics. The main implications of the estimated model are (a) the effect of a given shock to the long-run level of employment is markedly different at different levels of employment, and (b) asymmetric business cycles result with the downswing in employment being sharper and deeper than the upswing.