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

December 22, 2017
Issue 2017-18

Summary

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.

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Issue:
18
Pages:
54
JEL classification:
E24, E3
Keywords:
Financial constraints, employment, labor hoarding
Year:
2017

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Author(s)

  • Dr. Gregor Bäurle

  • Sarah M. Lein

  • Elizabeth Steiner

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