Paper #1618

Title:

Firing the wrong workers: Financing constraints and labor misallocation

Authors:

Andrea Caggese, Vicente Cuñat and Daniel Metzger

Date:

October 2017

Abstract:

Firms consider wages, current and expected productivity as well as firing and hiring costs when firing a worker. Financing constraints distort this intertemporal trade-off, leading firms to sub-optimally fire short-tenured workers with high future expected productivity.We provide empirical evidence of this distortion using matched employer-employee data from the Swedish population between 2000 and 2010. We propose a new empirical strategy that uses credit ratings to identify financing constraints and uses exchange rates and trade data to identify demand shocks. Our empirical results identify an important new misallocation effect of financial frictions that operates within firms across different types of workers.

Keywords:

Labor misallocation, firing decisions, financing constraints

JEL codes:

G32, J21, J24, J31

Area of Research:

Finance and Accounting

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