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Do plants freeze upon uncertainty shocks?

Author

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  • Mecikovsky, Ariel
  • Meier, Matthias
Abstract
Following the real option literature, whether or not uncertainty shocks drive business cycles depends on the degree of adjustment frictions. The more plants freeze and remain inactive in response to increased uncertainty, the stronger the adverse effects on the economic activity. Using quarterly labor flow data of U.S. establishments, we find that an unexpected increase in uncertainty reduces hiring, quits and job creation, while it raises layoffs and job destruction. Our finding suggests that plants remain active as a result of uncertainty shocks. A partial equilibrium model with capital and labor adjustment costs can not explain our empirical results. Surprise increases in uncertainty leads plants to freeze investment and labor policies. We are able to rationalize our findings using a version of this model without labor adjustment frictions. As uncertainty increases, more plants adopt a wait-and-see policy for investment. This, in turn, reduces capital through depreciation of the existing capital stock, and thereby lowers labor demand, which implies more layoffs and less hiring. The model implies that economies with flexible labor market regulations should experience more layoffs and job destruction upon an uncertainty shock with respect to economies with stricter regulations. Using additional labor ow data from Germany, France and UK, we obtain empirical evidence that supports this hypothesis.

Suggested Citation

  • Mecikovsky, Ariel & Meier, Matthias, 2014. "Do plants freeze upon uncertainty shocks?," EconStor Preprints 100662, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:100662
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    Cited by:

    1. Hiroaki Miyamoto, 2016. "Uncertainty shocks and labor market dynamics in Japan," Working Papers SDES-2016-8, Kochi University of Technology, School of Economics and Management, revised Jun 2016.
    2. Rangan Gupta & Chi Keung Marco Lau & Mark E. Wohar, 2019. "The impact of US uncertainty on the Euro area in good and bad times: evidence from a quantile structural vector autoregressive model," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(2), pages 353-368, May.
    3. Kovalenko, Tim, 2021. "Uncertainty shocks and employment fluctuations in Germany: The role of establishment size," Discussion Papers 119, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
    4. Pierdzioch Christian & Gupta Rangan, 2020. "Uncertainty and Forecasts of U.S. Recessions," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(4), pages 1-20, September.
    5. Mario Bossler, 2017. "Employment expectations and uncertainties ahead of the new German minimum wage," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(4), pages 327-348, September.
    6. Marta Martínez-Matute & Alberto Urtasun, 2022. "Uncertainty and firms’ labour decisions. Evidence from European countries," Journal of Applied Economics, Taylor & Francis Journals, vol. 25(1), pages 220-241, December.
    7. Marta Martínez-Matute & Alberto Urtasun, 2018. "Uncertainty, firm heterogeneity and labour adjustments. Evidence from European countries," Working Papers 1821, Banco de España.
    8. Tim Kovalenko, 2021. "Uncertainty shocks and employment fluctuations in Germany: the role of establishment size," Working Papers 212, Bavarian Graduate Program in Economics (BGPE).

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    More about this item

    Keywords

    Uncertainty; real-option; labor demand;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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