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Financing Constraints and Fixed-term Employment Contracts: Evidence from the 2008-2009 Financial Crisis

This paper investigates the effects of financing constraints on employment decisions of firms, when it is possible to choose between permanent and fixed-term workers. We use linked employer-employee data for the universe of private sector firms in Portugal, and the 2008-09 financial crisis as a shock for identification. We find that firms in sectors that intrinsically rely more on external finance increased the share of fixed-term employment and hires after the crisis, while the effect for firms with wider access to buyer-supplier credit is relatively lower. At the worker level, workers in sectors that require significant external financing are more likely to be hired with a fixed-term contract after the crisis, while those in sectors that have wider access to supplier credit are less likely. Our results suggest that the crisis induced financially constrained firms to use the more flexible fixed-term contracts more intensively. Credit from suppliers alleviated this effect by potentially providing an alternative source of funds to credit from financial institutions.

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Paper provided by Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho in its series NIMA Working Papers with number 58.

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Length: 33 pages
Date of creation: Jul 2015
Publication status: Published in European Economic Review, February 2017, Volume 92, pages 215-238
Handle: RePEc:nim:nimawp:58/2015
DOI: 10.1016/j.euroecorev.2016.12.009
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  1. Duygan-Bump, Burcu & Levkov, Alexey & Montoriol-Garriga, Judit, 2015. "Financing constraints and unemployment: Evidence from the Great Recession," Journal of Monetary Economics, Elsevier, vol. 75(C), pages 89-105.
  2. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 309-340.
  3. Raymond Fisman & Inessa Love, 2003. "Trade Credit, Financial Intermediary Development, and Industry Growth," Journal of Finance, American Finance Association, vol. 58(1), pages 353-374, 02.
  4. Giroud, Xavier & Mueller, Holger M, 2015. "Firm Leverage and Unemployment during the Great Recession," CEPR Discussion Papers 10539, C.E.P.R. Discussion Papers.
  5. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
  6. Samuel Bentolila & Marcel Jansen & Gabriel Jiménez & Sonia Ruano, 2013. "When Credit Dries Up: Job Losses in the Great Recession," Working Papers 2013-20, FEDEA.
  7. Yukako Ono & Daniel Sullivan, 2013. "Manufacturing Plants' Use of Temporary Workers: An Analysis Using Census Microdata," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 52(2), pages 419-443, 04.
  8. Juan J Dolado & Carlos Garcia--Serrano & Juan F. Jimeno, 2002. "Drawing Lessons From The Boom Of Temporary Jobs In Spain," Economic Journal, Royal Economic Society, vol. 112(721), pages 270-295, June.
  9. José Varejão & Pedro Portugal, 2003. "Why do Firms Use Fixed-Term Contracts?," Working Papers w200308, Banco de Portugal, Economics and Research Department.
  10. Chor, Davin & Manova, Kalina, 2012. "Off the cliff and back? Credit conditions and international trade during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 117-133.
  11. Siemer, Michael, 2014. "Firm Entry and Employment Dynamics in the Great Recession," Finance and Economics Discussion Series 2014-56, Board of Governors of the Federal Reserve System (U.S.).
  12. Xavier Giroud & Holger M. Mueller, 2015. "Firm Leverage and Unemployment during the Great Recession," NBER Working Papers 21076, National Bureau of Economic Research, Inc.
  13. Andrea Caggese & Vicente Cuñat, 2008. "Financing Constraints and Fixed-term Employment Contracts," Economic Journal, Royal Economic Society, vol. 118(533), pages 2013-2046, November.
  14. Michael Greenstone & Alexandre Mas & Hoai-Luu Nguyen, 2014. "Do Credit Market Shocks affect the Real Economy? Quasi-Experimental Evidence from the Great Recession and ‘Normal’ Economic Times," NBER Working Papers 20704, National Bureau of Economic Research, Inc.
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