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Liquidity Constraints Faced by Firms and Employment


  • Hannu Piekkola
  • Pertti Haaparanta


In this study on labour input and wage formation in Finland the importance of liquidity constraints measured by the ratio of interest payments to cash flow is examined. Financial solvency problems are shown to lead to a reduction in labour input, potentially explaining for the most part the 16% peak rate of unemployment during the deep recession period in the beginning of the 1990s. The link between leverage and “real-side” behaviour of firms is, hence, clear in labour input decisions. The large impact of leverage on employment can be explained by rigid wages and liquidity constraints. Labour hoarding and fixed costs in recruitment increase the long run effects, but also explain the weaker immediate effect as the level of liquidity constraints goes up.

Suggested Citation

  • Hannu Piekkola & Pertti Haaparanta, 2006. "Liquidity Constraints Faced by Firms and Employment," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 52(1), pages 55-73.
  • Handle: RePEc:aeq:aeqaeq:v52_y2006_i1_q1_p55-73

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    Cited by:

    1. Piekkola, Hannu, 2006. "Tax cuts and employment: Evidence from Finnish linked employer-employee data," Discussion Papers 1041, The Research Institute of the Finnish Economy.
    2. Eric S. Chou & Chien-Lung Chen, 2015. "Can Agents Be Better Off with Pay Caps?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(4), pages 1069-1090, October.

    More about this item


    Labour Demand; Labour Union; Financial Constraints; Firm Indebtedness;

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity


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