Paper #488

Title:

Job creation under liquidity constraints: The Spanish case

Author:

Silvio Rendón

Date:

July 2000

Abstract:

This paper shows that liquidity constraints restrict job creation even when labor markets are flexible. In a dynamic model of labor demand, I show that in an environment of imperfect capital and imperfect labor markets, firms use temporary contracts to relax financial constraints. Evidence for the predictions of the model is presented using Spanish data from the CBBE (Central de Balances del Banco de España - Balance Sheet data from the Bank of Spain). It is shown that firms substitute temporary labor for permanent one and use less debt as their financial position improves. In particular, it is rejected that Spanish firms operate in an environment of free capital markets and of no labor adjustment costs. The labor reform of 1984, which created temporary contracts, implied to some extent a relaxation of liquidity constraints. Accordingly, firms used these contracts more extensively and used less debt; however, as capital markets continue to be imperfect, permanent job creation continues to be slow. Consequently, relaxation of liquidity constraints should also be part of a job creation strategy.

Keywords:

Job creation, employment, investment, adjustment costs, liquidity constraints

JEL codes:

J23, J32,E22, G31

Area of Research:

Labour, Public, Development and Health Economics

Download the paper in PDF format