Essays on employment adjustment and labor utilization

This dissertation investigates the effect of labor adjustment costs on firm workforce dynamics. In particular, I focus on the trade-off between changes in the number of workers firms employ (extensive margin of adjustment) and the number of hours each employee works (intensive margin). The new administrative Danish firm data allow for a detailed analysis of the dynamic interaction between employment and labor utilization.;Chapter 1 presents the empirical evidence, based on a unique dataset drawn from a matched employer-employee panel of Danish firm data, that illustrates the importance of the reallocation of labor resources from less to more productive firms for the aggregate productivity growth. This reallocation is more prominent when the differences in work hours across firms are accounted for. Moreover, the empirical evidence suggests that in the short run firms use variation in hours to mitigate changes in the number of workers.;Chapter 2 develops a dynamic general equilibrium model that includes labor adjustment on both intensive and extensive margins, and subsequently tests the model using firm-level data. In order to capture the dynamic interaction between hours and employment growth found in the data, I introduce hiring frictions as a form of the adjustment costs. The model incorporates an on-the-job search that generates different vacancy filling and attrition rates across firms. Calibrated to fit Danish firm data, it successfully captures the overall features of the data. I use the parameterized model to simulate an increase in hiring costs and quantify its effect on unemployment and the job-finding rate. I show that doubling vacancy creation costs leads to a twice as large increase in the unemployment rate if work hours are not allowed to vary. The model is then used to evaluate two labor market policies aimed at promoting job creation: introduction of hiring subsidies and an upper limit on work hours.;Chapter 3 estimates the model using the indirect inference approach. From relations between wages, labor productivity, hours, and employment, I can recover the fundamental model parameters. In the process of matching the model to the data, I obtain the indirect estimate of the average hiring costs. I find that the average hiring costs of one worker is about two weeks of wages.