Job Creation and Investment in Imperfect Capital and Labor Markets
AbstractThis paper shows that liquidity constraints restrict job creation even with flexible labor markets. In a dynamic model of firm investment and demand for labor with imperfect capital markets, represented as a constraint on dividends, and imperfect labor markets, contained in legal firing costs applicable to some workers, firms use flexible labor contracts to alleviate financial constraints. The optimal policy rules of the theoretical model are integrated into a maximum likelihood procedure to recover the model's behavioral parameters. Data for the estimation come from the CBBE (Balance Sheet data from the Bank of Spain). I evaluate the effects of removing one imperfection at a time, and show that the relaxation of financial constraints produces (i) more job creation than the elimination of labor market rigidities, and (ii) a substantial increase in firm investment, which does not happen if only labor market rigidities are removed.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 432.
Date of creation: 04 Jul 2006
Date of revision:
Job Creation; Employment; Investment; Adjustment Costs; Liquidity Constraints; Structural Estimation;
Other versions of this item:
- Sílvio Rendon, 2004. "Job Creation and Investment in Imperfect Capital and Labor Markets," Economic Working Papers at Centro de Estudios Andaluces E2004/35, Centro de Estudios Andaluces.
- J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
- J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-15 (All new papers)
- NEP-FIN-2006-07-15 (Finance)
- NEP-MAC-2006-07-15 (Macroeconomics)
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