Employment Adjustment and Financial Constraints - Evidence from Firm-level Data

Gregor Bäurle, Sarah Lein and Elizabeth Steiner
Authors registered in the RePEc Author Service: Gregor Bäurle ()

No 2017-18, Working Papers from Swiss National Bank

Abstract: 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)
Pages: 54 pages
Date: 2017
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Employment Adjustment and Financial Constraints - Evidence from Firm-level Data (2018)
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