Discussion paper

DP13026 Credit Shocks, Employment Protection, and Growth: Firm-level Evidence from Spain

We offer new evidence on the real effects of credit shocks in the presence of employment
protection regulations by exploiting a unique provision in Spanish labor laws:
dismissal rules are less stringent for Spanish firms with fewer than 50 employees, lowering
the cost of hiring new workers. Using a new dataset, we find that during the financial
crisis, healthy firms with fewer than 50 employees borrowing from troubled banks
grew faster in sectors where capital and labor were sufficiently substitutable. This result
does not obtain when we use a different cut-off for Spain or the same cut-off for
firms in Germany. Our evidence suggests that labor market flexibility can dampen the
negative effect of credit shocks by allowing firms to keep growing by substituting labor
for capital.

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Citation

Laeven, L, P McAdam and A Popov (2018), ‘DP13026 Credit Shocks, Employment Protection, and Growth: Firm-level Evidence from Spain‘, CEPR Discussion Paper No. 13026. CEPR Press, Paris & London. https://cepr.org/publications/dp13026