Employment Adjustment and Labor Utilization

Standard models of labor adjustment assume that firms can change only the size of their workforce (the extensive margin) and not the number of hours of their existing employees (the intensive margin) in response to shocks. I propose a general equilibrium search model that allows for adjustment on both of these margins. The model includes on-the-job search that generates different vacancy filling and attrition rates across firms. I calibrate the model to a unique matched employer-employee panel of Danish firms and simulate two labor market policies aimed at promoting job creation: hiring subsidies and a reduction in the official workweek.