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Labor and Finance: Mortensen and Pissarides meet Holmstrom and Tirole


  • Pietro Garibaldi


In real life labor markets firms hold at all times a variety of liquid assets not invested in their core business. Such external use of funds acts as an insurance against future adverse financial shocks, and typically varies across firms and sectors. As a result, different firms use different degrees of financial leverage. This paper investigates the consequence of firms' use of funds on their hiring and firing policy. Using a standard matching model of unemployment, the paper finds an equilibrium interplay between the value of unemployment and financial conditions. Financial market imperfections- such as the probability of refinancing or firms' share of their pleadgeable income- affect equilibrium unemployment. In this sense, the paper brings together the work on liquidity by Holmstrom anf Tirole (2011) with the traditional Mortensen Pissarides (2004) model of equilibrium unemployment. The model implies also that at times of adverse financial shocks, firms that are more leveraged are more likely to liquiditate their assets and destroy jobs. Empirically, we test whether there is a causal link between firms leverage and job destruction at times of adverse financial shocks. We draw on firm-level data on employment adjustment matched with balance sheet records throughout the Great Recession and find that highly leveraged firms destroy more jobs during a financial crisis.

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  • Pietro Garibaldi, 2013. "Labor and Finance: Mortensen and Pissarides meet Holmstrom and Tirole," 2013 Meeting Papers 775, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:775

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    References listed on IDEAS

    1. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    2. Donatella Gatti & Christophe Rault & Anne-Gael Vaubourg, 2012. "Unemployment and finance: how do financial and labour market factors interact?," Oxford Economic Papers, Oxford University Press, vol. 64(3), pages 464-489, July.
    3. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    4. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    5. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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    Cited by:

    1. Kaas, Leo & Pintus, Patrick A. & Ray, Simon, 2016. "Land collateral and labor market dynamics in France," European Economic Review, Elsevier, vol. 84(C), pages 202-218.

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