Firm Financing and the Relative Demand for Labor and Capital
35 Pages Posted: 10 Oct 2019
Date Written: September 29, 2019
Using a European panel of mostly small and medium firms between 2004 and 2013, this paper introduces new stylized facts on how firms' relative demand for labor and capital evolved as their capital structure adjusted to the events of 2008 crisis. It also provides the first micro-level evidence that firms substitute capital for labor when their cost of financing rises, and that this substitution effect is driven by an incentive to raise holdings of collateralizable capital. Identification of exogenous variations in firm financing costs relies on the heterogeneous effects of ECB monetary policy surprises on financing costs (credit channel) across the firm distribution; less credit worthy firms experience a larger unexpected change in their borrowing and equity issuance costs in reaction to ECB surprises, generating exogenous variations in financing costs across and within firms. The analysis supports the message that maintaining a well functioning credit market should be an essential part of policies aiming at increasing the labor share of economic growth.
Keywords: labor market, financial frictions, jobless growth, labor share, firm-level heterogeneity
JEL Classification: E3, E5, G3, J2, J3
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