We use matched employer-employees data for Italy to study the joint response of wages
and employment to firm-level shocks. We construct a simple dynamic general equilibrium model
of labor demand and supply that allows us
to identify separately firing (or internal) and mobility (or external) adjustment costs. We show that the two type of costs
cannot be discriminated empirically by looking at labor or wage adjustment separately. Mobility costs have
distinctive implications on wage response to firm-level employment changes but they can only be identified with
worker-level information on wages. We find that both types of costs are present, but the internal component accounts
for a large share of total adjustment costs. Our results are consistent with a labor market
where workers are fairly mobile within locations but scarcely mobile across them
Adjustment costs, mobility costs, matched employer-employees data
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