Labour Demand, Flexible Contracts and Financial Factors: Firm‐Level Evidence from Spain*

Abstract

We estimate models of labour demand for a panel of 3,400 Spanish manufacturing firms over the period 1985-2001. We examine the roles of fixed-term contracts, financial factors and a policy reform in 1997 affecting permanent contracts by lowering payroll taxes and dismissal costs. Compared with permanent employment, the demand for flexible labour displays: (i) greater sensitivity to financial factors; (ii) greater cyclical sensitivity; (iii) a larger average wage elasticity; and (iv) less inertia. Our analysis of the 1997 policy reform suggests that a 5 percentage point reduction in the payroll tax is associated with an 8% increase in permanent labour demand. Copyright (c) Bank of England, 2007.

How does monetary policy affect labor demand and labor productivity?

“…Further supporting the above results, quite large effects were found from financial pressure on labor demand and employment in a large sample of manufacturing firms in Spain [5]. These effects also depended on some institutional elements of the labor market such as the incidence of permanent versus temporary contracts.…”

Unemployment and Finance: How do Financial and Labour Market Factors Interact?

“…Nickell & Nicolitsas (1999) establish that employment falls with the ratio of interest payment to cashflow. Benito & Hernando (2008) obtain the same outcome for Spanish firms. Caggese & Cunat (2008) establish that financial constraints affect firms' employment policy and the mix between permanent and temporary employment.…”

“…Nevertheless empirical studies addressing the issue are infrequent. A few empirical papers focus on the determinants of labour demand and provide evidence on the role of financial factors based on micro-data (Nickell & Wadhwani (1991), Sharpe (1994), Nickell & Nicolitsas (1999), Belke & Fehn (2002), Belke, Fehn & Foster (2004), Caggese & Cunat (2008) and Benito & Hernando (2008)). However, empirical contributions adressing the macroeconomic effects of interactions between institutions on labour and financial markets and focusing on aggregate employment are missing.…”

Assessing Determinants on Job Creation at the Firm Level: Swedish Micro Firm Data

“…The interaction between labour and financial market institutions has been regarded as one of the important determinants for aggregate employment, based on the industrial organization perspective or on a liquidity constraint approach (Benito & Hernando, 2008;Nickell & Nicolitsas, 1999;Nickell & Wadhwani, 1991;Sharpe,1994). However, the association between financing difficulty and employment at the firm level has been less frequent and subject to only a few empirical studies (Nickell & Nicolitsas, 1999;Sharpe, 1994).…”