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Labor and Finance: Mortensen and Pissarides meet Holmstrom and Tirole

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  • Pietro Garibaldi

Abstract

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

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    1. Rendon Sílvio, 2006. "Job Search And Asset Accumulation Under Borrowing Constraints ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 233-263, February.
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    6. 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.
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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.
    2. Floreani, Vincent Arthur, 2014. "Fixing Europe's youth unemployment and skills mismatch, can public financial support to SMEs be effective? The case of the European Commission and European Investment Bank joint initiatives," MPRA Paper 55849, University Library of Munich, Germany.

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