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Job Creation and Investment in Imperfect Capital and Labor Markets

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Author Info
Silvio Rendon () (Economics ITAM)

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Abstract

This 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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Publisher Info
Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 432.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:432

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Related research
Keywords: Job Creation; Employment; Investment; Adjustment Costs; Liquidity Constraints; Structural Estimation;

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Find related papers by JEL classification:
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; Investment Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Labor and Credit Market Imperfections," American Economic Review, American Economic Association, vol. 94(4), pages 944-963, September. [Downloadable!]
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  2. Victor Aguirregabiria & Cesar Alonso-Borrego, 2009. "Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain," Working Papers tecipa-346, University of Toronto, Department of Economics. [Downloadable!]
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  3. Alonso-Borrego, Cesar & Bentolila, Samuel, 1994. "Investment and Q in Spanish Manufacturing Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(1), pages 49-65, February.
  4. repec:fth:prinin:433 is not listed on IDEAS
  5. Maia Guell, 2000. "Fixed-term Contracts and Unemployment: an Efficiency Wage Analysis," Working Papers 812, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  6. Maia Güell, 2000. "Fixed-Term Contracts and Unemployment: An Efficiency Wage Analysis," CEP Discussion Papers dp0461, Centre for Economic Performance, LSE. [Downloadable!]
  7. James J. Heckman & Christopher J. Flinn, 1982. "New Methods for Analyzing Structural Models of Labor Force Dynamics," NBER Working Papers 0856, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 381-402, July. [Downloadable!] (restricted)
  9. Sharpe, Steven A, 1994. "Financial Market Imperfections, Firm Leverage, and the Cyclicality of Employment," American Economic Review, American Economic Association, vol. 84(4), pages 1060-74, September. [Downloadable!] (restricted)
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  10. Barlevy, Gadi, 2003. "Credit market frictions and the allocation of resources over the business cycle," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1795-1818, November. [Downloadable!] (restricted)
  11. Cabrales, Antonio & Hopenhayn, Hugo A., 1997. "Labor-market flexibility and aggregate employment volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46(1), pages 189-228, June. [Downloadable!] (restricted)
  12. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "The macroeconomic impact of flexible labor contracts, with an application to Spain," European Economic Review, Elsevier, vol. 36(5), pages 1013-1047, June. [Downloadable!] (restricted)
  13. Acemoglu, Daron, 2001. "Credit market imperfections and persistent unemployment," European Economic Review, Elsevier, vol. 45(4-6), pages 665-679, May. [Downloadable!] (restricted)
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  14. Nickell, Stephen & Nicolitsas, Daphne, 1999. "How does financial pressure affect firms?," European Economic Review, Elsevier, vol. 43(8), pages 1435-1456, August. [Downloadable!] (restricted)
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Cited by:
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  1. Andrea Caggese & Vicente Cuñat, 2006. "Financing Constraints and Fixed-Term Employment Contracts," Economics Working Papers 1010, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  2. Giovanna Aguilar & Sílvio Rendon, 2007. "Employment and Deadweight Loss Effects of Observed Non-Wage Labor Costs," IZA Discussion Papers 2856, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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