DP5267 Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants

Author(s): Marcela Eslava, John C Haltiwanger Jr, Adriana D. Kugler, Maurice Kugler
Publication Date: October 2005
Keyword(s): adjustment costs, deregulation, input reallocation, irreversibilities, joint factor adjustment
JEL(s): C14, E22, E24, J63, O11
Programme Areas: Labour Economics, Public Economics, Industrial Organization, Institutions and Economic Performance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5267

In this paper, we analyse employment and capital adjustments using a panel of plants from Colombia. We allow for nonlinear adjustment of employment to reflect not only adjustment costs of labour but also adjustment costs of capital, and vice-versa. Using data from the Annual Manufacturing Survey, which include plant-level prices, we generate measures of plant-level productivity, demand shocks, and cost shocks, and use them to measure desired factor levels. We then estimate adjustment functions for capital and labour as a function of the gap between desired and actual factor levels. As in other countries, we find non-linear adjustments in employment and capital in response to market fundamentals. In addition, we find that employment and capital adjustments reinforce each other, in that capital shortages reduce hiring and labour shortages reduce investment. Moreover, we find that the market oriented reforms introduced in Colombia after 1990 increased employment adjustments, especially on the job destruction margin, while reducing capital adjustments. Finally, we find that while completely eliminating frictions from factor adjustments would yield a dramatic increase in aggregate productivity through improved allocative efficiency, the reforms introduced in Colombia generated only modest improvements.