ABSTRACT
All firms react to changes in product demand or wages instantaneously, adjusting hours and hiring or firing labour, so that each firm operates at the static equilibrium input solution defined by current input prices and the production function. Significant adjustment costs mean that, following any change in input or product prices, the firm does not move instantly to a new equilibrium but moves gradually using a variety of adjustment devices. The use of optimisation techniques to derive the employment function assumes that the firm in making its adjustments always operates on the production function, i.e. always operates most efficiently in the static framework sense at each stage. Employment adjustments for the unskilled will mean more and quicker discharges than for the skilled. The firm’s adjustments will differ for different groups of workers: because fixed costs vary with skills there is an asymmetry in the experience of skilled and unskilled workers in terms of both wages and employment.
