Firms may adjust capital and labor sequentially or simultaneously. In this paper, we develop a structural model of interrelated factor demand subject to nonconvex adjustment costs and estimated by simulated method of moments. Based on Norwegian manufacturing industry plant-level data, parameter estimates reveal cost advantages for adjusting capital and making net changes in labor simultaneously. Factor demand models with fully specified interrelated adjustment costs structures perform best to describe the dynamic panel data.

A structural labor demand model is developed that allows for worker heterogeneity regarding firing costs and productivity. It is estimated for a firm in demise when 3,650 workers were made redundant in a restructuring following bankruptcy. This was the largest mass layoff in the history of the Netherlands. The model produces sharp predictions on how firing thresholds depend on individual worker characteristics. The signs of the estimated coefficients are consistent with these predictions. The model correctly predicts 68% of individual worker displacement. The results provide new in-depth knowledge on how firing costs influence personnel decisions.