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Firing the Wrong Workers: Financing Constraints and Labor Misallocation

Author

Listed:
  • Vicente Cunat

    (London School of Economics)

  • Daniel Metzger

    (Stockholm School of Economics)

  • Andrea Caggese

    (Pompeu Fabra University)

Abstract
This paper studies the effect of firms’ financing constraints on the decision of which workers to fire. Firms need to consider wages, current and expected productivity as well as firing and hiring costs when firing a worker. Financing constraints distort this inter-temporal trade-off leading firms to sub-optimal firing decisions. In particular, financially constrained firms may fire the wrong type of workers (e.g., workers with steeper productivity profiles or lower firing costs) relative to unconstrained firms. We provide empirical evidence of this distortion using matched employer-employee data from the Swedish population between 1990 and 2010. Financing constraints are identified using a regression discontinuity approach on the determination of a public discrete credit rating and a within firm-year estimator. Negative firm shocks are identified from firm-specific trade patterns and exchange rate fluctuations. Our empirical results reveal an important new misallocation effect of financial frictions that operates within firms across different types of workers.

Suggested Citation

  • Vicente Cunat & Daniel Metzger & Andrea Caggese, 2017. "Firing the Wrong Workers: Financing Constraints and Labor Misallocation," 2017 Meeting Papers 632, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:632
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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