Micro-level investment and labour demand

How firms respond to economic conditions and institutions has been a fundamental part of economics and the research agenda. Nonetheless, there are still many aspects of firm behaviour that are poorly understood or ambiguous, particularly from an empirical perspective. The objective of this thesis is to address a number of these issues in the context of Germany, a country that has not been widely considered in the literature. Firstly, Chapter 2 focuses on the expansion of capital stock and the identification of non-linearities in the investment profile. Our results using German data indicate that firms tend to expand over a longer period and that investment sensitivity to fundamentals is indeed non-linear. Moreover, previous studies have relied on the estimation methodology for identification of non-linearities, and we illustrate that this is not always consistent with micro-level investment decisions. Secondly, in Chapter 3 we expand the econometric specification to address dynamics and interrelation in both the adjustment of capital stock and employment. In this chapter a comparison of German and Dutch firms also allows us to investigate whether the institutional heterogeneity in the two countries is reflected in factor adjustment. Our results imply that the investment dynamics are similar, while the difference in labour adjustment is consistent with the greater labour market flexibility in the Netherlands. There is, however, only weak evidence of interrelation between investment and labour demand. Finally, in Chapter 4 we evaluate the impact of a reform to the dismissal protection legislation in Germany on labour adjustment at the establishment-level. This legislation imposes considerable dismissal costs above a certain threshold, which was changed as part of the reform. The results support the theoretical prediction that this threshold had a negative effect on employment growth, but there is also evidence that there were other factors driving changes in the probability of labour adjustment.