Firm Financing and the Relative Demand for Labor and Capital

35 Pages Posted: 10 Oct 2019

See all articles by Khalid ElFayoumi

Khalid ElFayoumi

German Institute for Economic Research (DIW Berlin); International Monetary Fund (IMF) - European Department

Date Written: September 29, 2019

Abstract

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

Suggested Citation

ElFayoumi, Khalid, Firm Financing and the Relative Demand for Labor and Capital (September 29, 2019). Available at SSRN: https://ssrn.com/abstract=3461265 or http://dx.doi.org/10.2139/ssrn.3461265

Khalid ElFayoumi (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

International Monetary Fund (IMF) - European Department

700 19th Street NW
Washington, DC 20431
United States

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