Employment Adjustment and Financial Constraints - Evidence from Firm-level Data
Sarah Lein () and
Authors registered in the RePEc Author Service: Gregor Bäurle ()
No 2017-18, Working Papers from Swiss National Bank
Firms adjust their employment to changes in output. But they tend to adjust employment only partially. Typically, labor is hoarded in downturns and subsequently ﬁrms have to hire less in upturns. Investment in labor hoarding may therefore be inﬂuenced by factors that impede investments, such as ﬁnancial constraints. Using ﬁrm-level data, we show that ﬁnancial constraints increase the sensitivity of employment to ﬂuctuations in output considerably. When output changes, ﬁnancially constrained ﬁrms resize their labor force substantially more than ﬁrms that have abundant funding. Limited internal funding opportunities turn out to be just as important as the reduced access to external ﬁnance. The strongest impact, however, is observed when internal and external constraints occur jointly. In that case, ﬁrms lay oﬀ two-and-a-half times more employees than unconstrained ﬁrms. The amplifying eﬀect of ﬁnancial constraints is similar in upturns and downturns, implying that ﬁnancially constrained ﬁrms not only reduce their workforce more when demand decreases, but they also hire more labor when demand increases.
Keywords: Financial constraints; employment; labor hoarding (search for similar items in EconPapers)
JEL-codes: E24 E3 (search for similar items in EconPapers)
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Working Paper: Employment Adjustment and Financial Constraints - Evidence from Firm-level Data (2018)
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