The Intensive Margin Puzzle and Labor Market Adjustment Costs
This paper documents a puzzling fact, namely that there is a significant negative relation
between employment protection legislation and the usage of the intensive margin of labor
market adjustments. I make use of a real business cycle model and introduce search and
matching frictions as well as adjustment costs along the extensive and the intensive labor
market margins. I show that the model is able to replicate the observed patterns of
cyclicality, volatility, and especially the behavior of extensive and intensive margins if we
assume low firing costs and relatively high hours adjustment costs.