Employment Adjustment and Financial Constraints - Evidence from Firm-level Data
Gregor Bäurle, Sarah M. Lein and Elizabeth Steiner
Financial constraints, employment, labor hoarding
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.