The negative profit employment adjustment model is a model in which the speed of employment adjustment is accelerated in periods of one year of large losses or two consecutive years' losses. In periods of positive profit of small losses, the speed of adjustment is slow since firms cannot use dismissals because of large fixed costs, including negotiating costs with unions. During such periods, employment adjustment is conducted only by means of stopping new hiring and increasing transfers to other firms. In periods of one year losses or two consecutive years of losses, dismissals are conducted with high probability since the cost of agreeing with unions on dismissals decrease because of the challenge of survival. The empirical analysis shows that the negative profit model explains the employment fluctuations in medium-size unionized firms very well. These findings suggest that union efforts in job security restrict firms' abilities to make downward adjustment in the work force and impose costs for such adjustment.
