Labor Adjustment Dynamics in Brazilian Manufacturing

In this paper we investigate the dynamics of labor adjustment at the firm level in Brazilian manufacturing, using information on average hours per worker to measure employment deviation from desired levels as in Caballero, Engel and Haltiwanger (1997). We use Brazilian manufacturing data at the establishment level and monthly frequency. The objective is to estimate the employment adjustment function, which relates the magnitude of employment changes to the size of employment gaps. The empirical results point to the presence of nonconvexities in employment adjustment costs in Brazilian manufacturing, with estimated employment adjustment rates increasing with the size of employment gaps. On average, employment adjustment rates range from 10% for small employment gaps to 35% for large employment gaps. The results also show that there is a large proportion of firms in the sample that do not adjust employment over two consecutive periods. We run several robustness tests with alternative ways of estimating the employment gaps, using other forms of dealing with measurement error and a problem of endogeneity of the hours change variable. Although the magnitudes of employment adjustment rates vary, we show that: i) the variations are in line with the expected directions of the biases in estimating the coefficient of the hours change variable; and ii) the format of employment adjustment functions do not change across specifications, always revealing employment adjustment rates increasing with the size of employment gaps, which is compatible with nonconvex costs of employment adjustment. We also study how the employment adjustment function varies by several establishment characteristics, such as skilled-labor intensity, size, payroll expenses, and overtime payments. We show that the employment adjustment function tends to have a higher mean and to display larger values when measured for establishments with characteristics that are arguably related to lower costs of employment adjustment: larger proportion of low-skilled workers, smaller size and lower overtime payments.