adjustment costs meaning
The costs of making changes in the economic variable one controls. Any economic agent, whether an individual, a firm, or a government, has a utility function which determines what the optimal levels of the variables they control would be, if they were free to make a fresh start in setting them. When actual levels differ from these optimal levels, adjustment costs must be considered. If adjustment costs are lump-sum, or increase proportionally or less than in proportion to the changes made in any one period, it will pay to make at once any change that is worth making at all. If adjustment costs increase more than proportionally to the size of the change, however, it pays to adjust only gradually. There are in fact cases where adjustment costs more if done rapidly than if done gradually. In adjusting its labour force, for example, a firm may find that small increases present no recruitment problem, and small decreases can be accommodated by not replacing natural wastage due to retirements and other voluntary departures, whereas rapid recruitment poses serious selection and training problems, and rapid decline involves redundancy, which are expensive and damaging to morale.
- However, who is going to bear adjustment costs in the short term?
- There are large short-term adjustment costs to be borne, which may generate social tensions.
- Generally adjustment costs or distribution effects are thought to be small if the MIIT index is high.
- This will result in slower adjustment costs to regional economic shocks which can result in higher unemployment.
- John A . Lee later claimed that this adjustment cost him his Auckland East seat in the.