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Labour Demand and Financial Markets Imperfections

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  • Giovanni Pica

Abstract

Labour demand and financial markets imperfections (di Giovanni Pica) - ABSTRACT: This paper analyses the cyclicality of labour demand and its sensitivity to the cycle in economies characterized by imperfections in capital markets. We show that, in such a case, labour demand depends on firms? self-financing ability and is affected by changes in the interest rate. Endogenous borrowing constraints affect employment policies by inducing firms to risk averse behaviour, which may reduce their ex-ante willingness to hire. Consistently with recent empirical findings, the model predicts that the more constrained firms are financially fragile, the more the cyclical behaviour of their labour demand is pronounced. This means that, for a given realization of the shock, more leveraged firms adjust their employment level relatively more than more capitalized firms. Furthermore, firms with higher debt to own funds ratios are shown to be more sensitive to the cycle, i.e. to react more to marginal changes in the realization of the shock. JEL Classification: J21, J23, E32, D21

Suggested Citation

  • Giovanni Pica, 2001. "Labour Demand and Financial Markets Imperfections," STUDI ECONOMICI, FrancoAngeli Editore, vol. 2001(73).
    • Handle: RePEc:fan:steste:v:html10.3280/ste2001-073003
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    Cited by:

    1. Giorgio Calcagnini & Germana Giombini & Enrico Saltari, 2009. "Firms? Investment in the Presence of Labor and Financial Market Imperfections," Working Papers 0901, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2009.
    2. Calcagnini, Giorgio & Giombini, Germana & Saltari, Enrico, 2009. "Financial and labor market imperfections and investment," Economics Letters, Elsevier, vol. 102(1), pages 22-26, January.

    More about this item

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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