On the Volatility of Capital Stock and Labor

Using Compustat, we present a surprising empirical fact: that at the firm level, the capital stock is at least as volatile as labor if not more. Given both recent research which has found unexpected large labor movements at the micro-level, and the standard textbook assumption that the capital stock is fixed in the short run, this finding seems even more unforeseen. This result holds for a wide range of different measures of the capital stock. The measurement issues considered here include different depreciation patterns and rates as well as retirement schedules. We find that the volatility is persistent, and there is some evidence of the existence of a significant and growing capital stock market in which about 1.5% of the total capital stock is sold each year. We use a VAR model to parsimoniously describe the dynamic relationship among output, the capital stock and labor. Based on the estimated VAR model, we find that volatility of the capital stock contributes more than that of labor to the volatility of the output, indicating the importance of understanding the high volatility of the capital stock.