Credit Shocks, Employment Protection, and Growth: Firm-Level Evidence from Spain

64 Pages Posted: 3 Jul 2018

See all articles by Luc Laeven

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Peter McAdam

European Central Bank (ECB)

Alexander A. Popov

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018

Abstract

We offer new evidence on the real effects of credit shocks in the presence of employment protection regulations by exploiting a unique provision in Spanish labor laws: dismissal rules are less stringent for Spanish firms with fewer than 50 employees, lowering the cost of hiring new workers. Using a new dataset, we find that during the financial crisis, healthy firms with fewer than 50 employees borrowing from troubled banks grew faster in sectors where capital and labor were sufficiently substitutable. This result does not obtain when we use a different cut-off for Spain or the same cut-off for firms in Germany. Our evidence suggests that labor market flexibility can dampen the negative effect of credit shocks by allowing firms to keep growing by substituting labor for capital.

Keywords: capital-labor substitution, credit crunch, employment protection, Firm Growth

JEL Classification: D20, G21, J80

Suggested Citation

Laeven, Luc A. and McAdam, Peter and Popov, Alexander A., Credit Shocks, Employment Protection, and Growth: Firm-Level Evidence from Spain (June 2018). CEPR Discussion Paper No. DP13026, Available at SSRN: https://ssrn.com/abstract=3206792

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Peter McAdam

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Eurotower
D-60311 Frankfurt am Main
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Alexander A. Popov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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