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Labour demand and financial market imperfections

Labour demand and financial market imperfections
Labour demand and financial market imperfections
This paper analyses the cyclicality of labour demand and its sensitivity to the cycle in economies characterized by imperfections in capital markets. We show that, in such a case, labour demand depends on firms’ self-financing ability and is affected by changes in the interest rate. Endogenous borrowing constraints affect employment policies by inducing firms to risk averse behaviour, which may reduce their ex-ante willingness to hire. Consistently with recent empirical findings, the model predicts that the more constrained firms are financially fragile, the more the cyclical behaviour of their labour demand is pronounced. This means that, for a given realization of the shock, more leveraged firms adjust their employment level relatively more than more capitalized firms. Furthermore, firms with higher debt to own funds ratios are shown to be more sensitive to the cycle, i.e. to react more to marginal changes in the realization of the shock.
Pica, Giovanni
b040ac62-6055-4724-a6bf-eab1efc22915
Pica, Giovanni
b040ac62-6055-4724-a6bf-eab1efc22915

Pica, Giovanni (2001) Labour demand and financial market imperfections. Studi Economici, 73.

Record type: Article

Abstract

This paper analyses the cyclicality of labour demand and its sensitivity to the cycle in economies characterized by imperfections in capital markets. We show that, in such a case, labour demand depends on firms’ self-financing ability and is affected by changes in the interest rate. Endogenous borrowing constraints affect employment policies by inducing firms to risk averse behaviour, which may reduce their ex-ante willingness to hire. Consistently with recent empirical findings, the model predicts that the more constrained firms are financially fragile, the more the cyclical behaviour of their labour demand is pronounced. This means that, for a given realization of the shock, more leveraged firms adjust their employment level relatively more than more capitalized firms. Furthermore, firms with higher debt to own funds ratios are shown to be more sensitive to the cycle, i.e. to react more to marginal changes in the realization of the shock.

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Published date: 2001

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Local EPrints ID: 33419
URI: http://eprints.soton.ac.uk/id/eprint/33419
PURE UUID: 3a3a7870-7e81-45bb-83a7-923634ed20f6

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Date deposited: 17 May 2006
Last modified: 11 Dec 2021 15:20

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Contributors

Author: Giovanni Pica

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