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Searching, Matching, Sorting, and Separating in the Labour Market: Costs, Structure and Consequences of Employment Adjustment in Dynamic Frictional Economies

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How to appease workers' concerns and protect firm profitability

Companies often respond to financial crisis with cost-cutting measures known as adjustment costs that affect the workforce. EU-funded researchers examined the impact of employment adjustment using data from Denmark to answer related policy questions.

Industrial Technologies

The project SMSS (Searching, matching, sorting, and separating in the labour market: Costs, structure and consequences of employment adjustment in dynamic frictional economies) modelled the economics of the labour market when firms are subject to financial shocks. Three research questions guided the project's objectives. The first asked: How do recessions affect the age-related structure of the firms' workforce adjustment? Using a project-developed labour demand framework, the team found that firms behave as predicted with regard to their low-skilled workforce, but not in relation to their high-skilled employees. The work is presented in the co-authored paper 'Firm downsizing, public policy, and the age structure of employment adjustments'. The second question and research pillar was: How are employment adjustment costs distributed among workers searching for jobs and firms paying hiring and firing costs? The particular focus here was on the nexus between different internal and external employment adjustment costs. Researchers produced two relevant co-authored papers: 'Performance pay, wage dispersion, and job separation' and 'Returns to tenure or seniority?' The research brings together workers' career concerns and firms' profitability concerns, when costs of adjustment materialize as specific investment. Ongoing work is focused on extending a dynamic equilibrium model of labour demand and supply, and labour and capital as firms' production inputs. Finally, the third question was: How does labour adjustment influence sorting patterns between workers and firms? Research findings show that firms do offer monetary compensation for certain types of contractual disamenities – e.g. inflexible time schedules or shift work. Two co-authored papers present the findings of this line of inquiry: 'Job hazard premia and worker risk preferences' and 'Tenure profiles and efficient separation in a stochastic productivity model'. Project work offers a clearer picture of distressed firms' strategic layoff behaviours in relation to existing public institutional incentives. The final outcomes of SMSS could help policymakers better correlate employment policies, especially in times of economic crisis.


Profitability, adjustment costs, employment adjustment, SMSS, labour market

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