 The marginal propensity to hireNo 875, Staff Reports from Federal Reserve Bank of New York Abstract: This paper studies the link between firm-level financial constraints and employment decisions, as well as the implications for the propagation of aggregate shocks. I exploit the idea that, when the financial constraint binds, a firm adjusts its employment in response to cash flow shocks. I identify such shocks from changes to business rates, a U.K. tax based on a periodically estimated value of the property occupied by the firm. A 2010 revaluation implied that similar firms, occupying similar properties in narrowly defined geographical locations, experienced different tax changes, allowing me to control for confounding shocks to local demand. I find that, on average, for every 1 of additional cash flow, 39 pence are spent on employment. I label this response the marginal propensity to hire (MPH). I then calibrate a firm dynamics model with financial frictions toward this empirical evidence. As in the data, small and leveraged firms in the model have a greater MPH. Simulating a tightening of credit conditions, I find that the model can account for much of the decline in U.K. aggregate output and employment observed in the wake of the financial crisis. Keywords: financial frictions; employment; heterogeneous firms (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:875 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC. |
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