Modelling Labour Demand Dynamics beyond the Frictionless Environment

Abstract

In this study we develop a simple econometric model for labour demand dynamics by explicitly considering deviations from the standard frictionless economic environment. In particular, we explore the potential effect on labour demand of capital market imperfections, labour market institutional rigidities in the form of union power, and the impact of uncertainty. In addition, in the presence of uncertainty, adjustment costs and irreversibility emerge as an important factor that introduces an option value of waiting. According to our results, leverage exerts a direct negative impact on employment dynamics indicating that capital market imperfections are indeed present. Moreover, leverage is found to also affect the adjustment process of employment. Finally, we document asymmetric effects of frictions on labour demand across different size groups that imply a higher vulnerability of small and medium sectors with respect to debt levels. Uncertainty exerts a significantly negative impact on labour demand, which is compatible with presence of partial irreversibility of employment decisions. Finally, unions over and above their effect via higher wages are positively related to employment, a finding that is indicative of their pursue for job security. Copyright 2006 The Authors; Journal compilation 2006 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd..

What else lies behind the credit rationing? Exploring the issue of employment

“…Such a relationship can have important effects on the real economic activity; however, only a handful of relevant studies have explored this issue (Campello et al, 2010;Benmelech et al, 2011;Ferrando and Mulier, 2015;Gerlach-Kristen et al, 2015;G omez, 2019). Indeed, if a firm formulates its employment decisions within a Modigliani and Miller (1958) world, such an economy would be characterised by a dichotomy between the real and financial decisions of firms and full reversibility of production decisions (Drakos and Kallandranis, 2006). This ideal environment guarantees that in the occurrence of a stochastic shock, labour demand would respond fully and immediately to its long-run state variables.…”

“…Indeed, if a firm formulates its employment decisions within a Modigliani and Miller (1958) world, such an economy would be characterised by a dichotomy between the real and financial decisions of firms and full reversibility of production decisions (Drakos and Kallandranis, 2006). This ideal environment guarantees that in the occurrence of a stochastic shock, labour demand would respond fully and immediately to its long-run state variables.…”

Frictions and adjustment mechanisms in the Swiss economy : three empirical essays using firm-level data

“…6 On the other hand, we contribute to the literature on employment and financial constraints, which provides evidence that financial constraints have a direct effect on employment. Cantor (1990), Sharpe (1994), Funke, Maurer, and Strulik (1999), Ogawa (2003) and Drakos and Kallandranis (2006), examine the impact of firm-side financial constraints.…”