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Monopolistic competition, costs of adjustment and the behavior of European manufacturing employment

Author: Burda, Michael C. INSEAD Area: Economics and Political ScienceIn: European Economic Review, vol. 35, 1991 Language: EnglishDescription: p. 61-79.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: In this paper, a dynamic model of employment under monopolistic competition is derived and estimated with manufacturing data from European countries and the US. While there is only weak evidence of higher quadratic adjustment costs in Europe at annual sampling frequencies, imputed labour charges and the linear component of hiring and firing costs are significantly estimated with magnitudes consistent with EC survey evidence. The model finds evidence of monopolistically competitive behavior in the larger European economies only. The pattern of rejection of the model's overidentifying restrictions, and the covariance of estimated residuals, are consistent with the absence of operative quantity constraints on firms
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INSEAD Article Europe Campus
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In this paper, a dynamic model of employment under monopolistic competition is derived and estimated with manufacturing data from European countries and the US. While there is only weak evidence of higher quadratic adjustment costs in Europe at annual sampling frequencies, imputed labour charges and the linear component of hiring and firing costs are significantly estimated with magnitudes consistent with EC survey evidence. The model finds evidence of monopolistically competitive behavior in the larger European economies only. The pattern of rejection of the model's overidentifying restrictions, and the covariance of estimated residuals, are consistent with the absence of operative quantity constraints on firms

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