Summary and Conclusions
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The macroeconomic markets for goods and labor are regarded as heterogeneous aggregates, consisting of a multitude of micro markets on which demand/supply ratios differ. The distribution of these ratios in the population of firms is described by statistical density functions. By aggregation, the “sharp corners” of the firm level minimum-conditions are converted into continuous nonlinear macro relationships, mapping aggregate demand and supply onto aggregate transactions (observed output and employment). In this framework, the different regimes — discrete states for individual firms — and the associated spillover effects always co-exist at the macro level, in varying proportions though, depending on the course of the aggregate demands and supplies. This modelling approach nicely captures a characteristic property of business surveys, namely that the overall business cycle is superimposed in the cross-section of firms by numerous “local” or “market-specific” factors. Hence, incorporation of business survey data as regime-classification information, measuring the proportions of firms in the different regimes, is straightforward.
The specifications in the production sector of the model — i.e. firms’ decisions on investment, output supply and labor demand — are derived on basis of a vintage-approach. Thus, the development of the production apparatus is explained in terms of scrapping of old capacities and the creation of new ones, involving demand expectations, profitability and relative factor costs as determinants.
The model allows for a production smoothing role of buffer stocks. The basic notion is that firms let differences between current demand and predetermined output be absorbed within the period (quarter) by inventories or unfilled orders; when deciding on next period’s output and employment, they attempt to gradually reduce deviations of these buffer stocks from target levels. As compared to usual disequilibrium models that neglect the existence of buffer stocks, this specification gives rise to a modification of the short-term link between current demand and output, but does not invalidate the concept of spillovers between goods and labor markets in a fundamental way.
KeywordsLabor Market Labor Supply Labor Demand Aggregate Demand Buffer Stock
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- 2.Compare the policy proposal outlined in Dréze (1987).Google Scholar