Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210727 
Year of Publication: 
2018
Series/Report no.: 
Staff Report No. 875
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
This paper studies the link between firm-level financial constraints and employment decisions, as well as the implications for the propagation of aggregate shocks. I exploit the idea that, when the financial constraint binds, a firm adjusts its employment in response to cash flow shocks. I identify such shocks from changes to business rates, a U.K. tax based on a periodically estimated value of the property occupied by the firm. A 2010 revaluation implied that similar firms, occupying similar properties in narrowly defined geographical locations, experienced different tax changes, allowing me to control for confounding shocks to local demand. I find that, on average, for every £1 of additional cash flow, 39 pence are spent on employment. I label this response the marginal propensity to hire (MPH). I then calibrate a firm dynamics model with financial frictions toward this empirical evidence. As in the data, small and leveraged firms in the model have a greater MPH. Simulating a tightening of credit conditions, I find that the model can account for much of the decline in U.K. aggregate output and employment observed in the wake of the financial crisis.
Subjects: 
financial frictions
employment
heterogeneous firms
JEL: 
E24
E44
G01
G32
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.