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Resumen
We analyze how firms adjust their labor in response to idiosyncratic shifts in their production function and demand curves using a unique data-set of Swedish manufacturing firms. We show that the adjustment to permanent firm-level demand shocks is substantial, rapid and unconstrained. The choice of adjustment margin depends on the sign of the shock: Firms adjust through increased hires if these shocks are positive and through increased separations if the shocks are negative. In contrast, both transitory demand shocks and shocks to physical productivity have very small effects on firm-level employment decisions, despite being important determinants of other firm-level fundamentals.
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