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Credit shocks, employment protection, and growth: firm-level evidence from Spain

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  • Laeven, Luc
  • McAdam, Peter
  • Popov, Alexander

Abstract

We offer new evidence on the real effects of credit shocks in the presence of employment protection regulations by exploiting a unique provision in Spanish labor laws: dismissal rules are less stringent for Spanish firms with fewer than 50 employees, lowering the cost of hiring new workers. Using a new dataset, we find that during the financial crisis, healthy firms with fewer than 50 employees borrowing from troubled banks grew faster in sectors where capital and labor were sufficiently substitutable. This result does not obtain when we use a different cut-off for Spain or the same cut-off for firms in Germany. Our evidence suggests that labor market flexibility can dampen the negative effect of credit shocks by allowing firms to keep growing by substituting labor for capital. JEL Classification: G21, J80, D20

Suggested Citation

  • Laeven, Luc & McAdam, Peter & Popov, Alexander, 2018. "Credit shocks, employment protection, and growth: firm-level evidence from Spain," Working Paper Series 2166, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182166
    Note: 261593
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    Cited by:

    1. Bendicta Marzinotto & Ladislacv Wintr, 2019. "Employment protection and firm-level job reallocation: Adjusting for coverage," BCL working papers 131, Central Bank of Luxembourg.
    2. Setzer, Ralph & Stieglitz, Moritz, 2019. "Firm-level employment, labour market reforms, and bank distress," IWH Discussion Papers 15/2019, Halle Institute for Economic Research (IWH).
    3. repec:ecb:ecbrbu:2018:0052: is not listed on IDEAS

    More about this item

    Keywords

    capital-labor substitution; credit crunch; employment protection; firmgrowth;

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J80 - Labor and Demographic Economics - - Labor Standards - - - General

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