Working Paper: CEPR ID: DP13026
Authors: Luc Laeven; Peter McAdam; Alexander Popov
Abstract: We offer new evidence on the real effects of credit shocks in the presence of employmentprotection regulations by exploiting a unique provision in Spanish labor laws:dismissal rules are less stringent for Spanish firms with fewer than 50 employees, loweringthe cost of hiring new workers. Using a new dataset, we find that during the financialcrisis, healthy firms with fewer than 50 employees borrowing from troubled banksgrew faster in sectors where capital and labor were sufficiently substitutable. This resultdoes not obtain when we use a different cut-off for Spain or the same cut-off forfirms in Germany. Our evidence suggests that labor market flexibility can dampen thenegative effect of credit shocks by allowing firms to keep growing by substituting laborfor capital.
Keywords: credit crunch; employment protection; capital-labor substitution; firm growth
JEL Codes: G21; J80; D20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit crunch of 2008-09 (G01) | firms with fewer than 50 employees growth (L25) |
| lower firing costs (L94) | firms with fewer than 50 employees growth (L25) |
| firms with fewer than 50 employees growth (L25) | hire more workers (J23) |
| firms with fewer than 50 employees growth (L25) | substitute labor for capital (J24) |
| credit shocks (G21) | sales growth of small firms in high elasticity sectors (L25) |
| lower firing costs (L94) | mitigate negative impact of increased capital costs (G31) |
| employment protection regulations based on firm size (M51) | firm growth (L26) |