Journal Article

The Intensive Margin Puzzle and Labor Market Adjustment Costs


  • Wesselbaum
  • D.
Publication Date

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.


JEL Classification
C10, E32, J41

Key Words

  • adjustment costs
  • extensive margin
  • Intensive margin