Job Creation and Investment in Imperfect Capital and Labor Markets

No 432, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: This paper shows that liquidity constraints restrict job creation even with flexible labor markets. In a dynamic model of firm investment and demand for labor with imperfect capital markets, represented as a constraint on dividends, and imperfect labor markets, contained in legal firing costs applicable to some workers, firms use flexible labor contracts to alleviate financial constraints. The optimal policy rules of the theoretical model are integrated into a maximum likelihood procedure to recover the model's behavioral parameters. Data for the estimation come from the CBBE (Balance Sheet data from the Bank of Spain). I evaluate the effects of removing one imperfection at a time, and show that the relaxation of financial constraints produces (i) more job creation than the elimination of labor market rigidities, and (ii) a substantial increase in firm investment, which does not happen if only labor market rigidities are removed.

Keywords: Job Creation; Employment; Investment; Adjustment Costs; Liquidity Constraints; Structural Estimation (search for similar items in EconPapers)
JEL-codes: E22 G31 J23 J32 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-fin and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Job Creation and Investment in Imperfect Capital and Labor Markets (2004)
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