Employment adjustment and financial constraints: Evidence from firm-level data

Arbeitspapier

Firms adjust their employment to changes in output. But they tend to adjust it 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: WWZ Working Paper ; No. 2018/07

Classification and Topics

• Classification: Wirtschaft ; Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
• Subject: financial constraints ; employment ; labor hoarding

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bäurle, Gregor ; Lein-Rupprecht, Sarah M. ; Steiner, Elizabeth
• Event: Veröffentlichung
• (who): University of Basel, Center of Business and Economics (WWZ)
• (where): Basel
• (when): 2018

Further information

• DOI: doi:10.5451/unibas-ep61495
• Handle: http://hdl.handle.net/10419/185809
• Last update: 10.03.2025, 11:42 AM CET