Work in Progress
International Journal of Finance and Economics, (2018) vol. 23, no. 2, pp. 257-282, joint with Annalisa Ferrando
(previous version appeared as ECB working paper 2015 n.1823)
Media Coverage: centralbanking.com, elMon.cat
Using firm‐level data from the Bureau van Dijk‐Amadeus database, we study the relation between firms' financial structure, access to external finance, and total factor productivity in several euro area countries along the period 1995–2011. To do so, we build a synthetic indicator of financial constraints using an a priori classification based on specific firm characteristics and measures of financial pressure, and we embed it into a production equation, which controls for the endogenous relation between labour decisions and productivity innovations. We find a negative and significant estimate for the elasticity of total factor productivity with financial constraints of −18%. This effect significantly amplifies in small, young, and private companies, it is likely to persist over time, and it increased during the recent financial crisis. A counterfactual exercise shows that peripheral countries are likely to gain between 19% and 22% of their average total factor productivity from free access to finance. Results are robust to several robustness checks.
KEYWORDS: Financial constraints, productivity, sectoral analysis, SMEs
JEL CODES: D24, G32, O16
(Previous version appeared as GEP Discussion Paper 19/15)
How do labor market policies interact with trade reforms? Do minimum wage regulation and employment protection legislation hamper the gains from trade? Are these regulations effective in protecting workers from import competition? I answer these questions by studying how labor market institutions at the time of a trade reform determine the dynamic adjustment to trade. I first document that for a large group of developing countries (1) unemployment increases following a trade reform, and (2) the response is stronger when the firing costs are lower and the statutory minimum wage is higher. I interpret this evidence through the lens of a model of international trade, featuring heterogeneous firms, endogenous industry dynamics and search and matching frictions in a dual labor market. I calibrate the model to match the pre-liberalization firm and labor market dynamics in Colombia and Mexico, two countries that differed by the labor regulations in place at the time of trade liberalization, and I solve the full transition path towards the new steady state. I show that lower firing costs and higher minimum wage enhance firm selection following a trade liberalization, fostering shortand long-run gains from trade at the expense of higher job reallocation between and within industries, and higher unemployment. Taken together, these two institutions can explain around 30% of the short-run and up to 60% of the long-run cross-country difference in unemployment response to a fall in trade costs. Finally, I find that a strong efficiency-equity trade-off arises as an economy reduces employment rigidities in favor of stronger downward wage rigidities.
KEYWORDS: Trade reform, labor market institutions, unemployment, transitional dynamics, gains from trade
JEL CODES: E24, F12, F16, L11
CFCM working paper 21/01, joint with Nezih Guner
For a large set of countries, we document how the distribution of labor earnings varies by development. Data reveals that changes in earning distributions are not trivial: while the standard deviation of log earnings increases with GDP per capita, the mean-to-median ratio declines. We interpret this fact within a model economy with heterogeneous workers and firms, featuring industry dynamics, labor market frictions, skill accumulation of workers with learning-by-doing and on-the-job training, and earnings inequality across firms and workers. The benchmark economy is calibrated to the UK. We study how the earnings distribution changes as we introduce two distortions in the benchmark economy: wedges on firms' output that are correlated with firm productivity and reductions in the labor market's ability to match unemployed workers and open vacancies. These distortions lead to resources misallocation and reduce employment, average firm size and GDP per capita. They also affect how much firms are willing to pay to workers, how well the skilled workers are matched with high-productivity firms, and how much training workers receive. The model is consistent with a host of facts on changes in firm size distribution, firms' training decisions, and workers' life-cycle earnings profiles along development. It also delivers changes in earnings distribution in line with the data.
KEYWORDS: labor market frictions, correlated distortions, productivity, establishment size, human capital accumulation, job training, life-cycle wage profile, inequality, development
JEL CODES: E23, E24, O11, O47
CEPR Covid Economics 20/29, joint with Jake Bradley and Adam H. Spencer
Revise and resubmit at the European Economic Review
This paper develops a choice-theoretic equilibrium model of the labor market in the presence of a pandemic. It includes heterogeneity in productivity, age and the ability to work from home. Worker and firm behavior changes in the presence of the virus, which itself has equilibrium consequences for the infection rate. The model is calibrated to the UK and counterfactual lockdown measures are evaluated. We find a different response in both the evolution of the virus and the labor market with different lockdown policies. A laissez-faire approach results in lives lost and acts as negative shock to the economy. A lockdown policy, absent any other intervention, will reduce the lives lost but increase the economic burden. Consistent with recent evidence, we find that the economic costs from lockdown are most felt by those earning the least. Finally, we introduce a job retention scheme as implemented by the UK Government and find that it spreads the economic hardship more equitably.
KEYWORDS: Covid-19, SIR model, search and matching, lockdown, furlough
JEL CODES: I1, I3, J1, J6