HYSTERESIS IN THE DYNAMICS OF EMPLOYMENT

ABSTRACT

In this paper, we derive a micro model of employment demand with hysteresis whereby firms can adjust along an intensive (employment) and an extensive (hours of work) margin. A mechanism of aggregation over heterogeneous firms is used to generate the corresponding aggregate dynamics. Longitudinal micro monthly data on a representative sample of Portuguese manufacturing firms are used in the empirical analysis. Our results indicate that signs of hysteresis found at the micro level do not vanish completely by aggregation and that hysteresis is magnified by the existence of an additional margin of adjustment (the hours adjustment margin).