“The Marginal Propensity to Hire”
Abstract: This paper studies the link between ﬁrm-level ﬁnancial constraints and employment decisions, as well as the implications for the propagation of aggregate shocks. I exploit the idea that, when the ﬁnancial constraint binds, a ﬁrm adjusts its employment in response to cash ﬂow shocks. I identify such shocks from changes to business rates, a UK tax based on a periodically estimated value of the property occupied by the ﬁrm. A 2010 revaluation implied that similar ﬁrms, occupying similar properties in narrowly deﬁned geographical locations, experienced different tax changes, allowing me to control for confounding shocks to local demand. I ﬁnd that, on average, for every £1 of additional cash ﬂow, 39 pence are spent on employment. I label this response the Marginal Propensity to Hire (MPH). I then calibrate a ﬁrm dynamics model with ﬁnancial frictions towards this empirical evidence. As in the data, small and leveraged ﬁrms in the model have a greater MPH. Simulating a tightening of credit conditions, I ﬁnd that the model can account for much of the decline in UK aggregate output and employment observed in the wake of the ﬁnancial crisis.
Facultad de Ciencias Económicas y Administrativas UC
CONTACTO DEL EVENTO