The Financial Channels of Labor Rigidities: Evidence from Portugal
joint with Ettore Panetti and Alessandro Sforza
Winner of the prize on "Savings and Financing of the Portuguese Economy" awarded by the Office of Strategy and Studies (GEE) of the Portuguese Ministry of Economy and the Portuguese Association of Insurers (APS).
How do credit shocks affect labor market reallocation and firms’ exit, and how does their propagation depend on labor rigidities at the firm level? To answer these questions, we match administrative data on worker, firms, banks and credit relationships in Portugal, and conduct an event study of the interbank market freeze at the end of 2008. Consistent with other empirical literature, we provide novel evidence that the credit shock had significant effects on employment and assets dynamics and firms’ survival. These findings are entirely driven by the interaction of the credit shock with labor market frictions, determined by rigidities in labor costs and exposure to working-capital financing, which we label “labor-as-leverage” and “labor-as-investment” financial channels. The credit shock explains about 29 percent of the employment loss among large Portuguese firms between 2008 and 2013, and contributes to productivity losses due to increased labor misallocation.
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