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
GEP Discussion Paper 2019/15
In this paper I study how labor market institutions at the time of a trade reform determine the post-reform dynamics of unemployment. I first document that for a large group of developing countries (1) unemployment increases on average following a trade reform, (2) there are significant cross-country differences in unemployment response, and (3) cross-country variation in the labor market institutions in place at the time of the reform can account for the observed unemployment changes. 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 the labor market. I estimate the model to match the pre-liberalization firm dynamics in Colombia and Mexico, two countries that differed by the labor regulations in place at the time of trade liberalization, and I characterize numerically the full transition path towards the new steady state. I show that the dynamic response of unemployment to a reduction in trade costs is non-linear across different combinations of labor market institutions in place at the time of the reform. Consistent with the cross-country evidence, the response is stronger and more persistent when the firing costs are lower and the statutory minimum wage and unemployment benefits are larger. These three institutions can account for up to 46 percent of the average unemployment response in the case of Mexico, and up to 41 percent in the case of Colombia.
KEYWORDS: Trade reform, labor market institutions, unemployment, transitional dynamics, gains from trade
JEL CODES: E24, F12, F16, L11