{ "title": "Labor’s Liquidity Service and Firing Costs", "publication": "IMF Working Papers, May 1, 2007", "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937", "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937", "overlayPath": "/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937/index.md", "summary": "This paper proposes a new effect of firing costs on firms' behavior that builds from firms' demand for liquidity. When a time gap exists between production and its associated revenues, firing can become a liquidity adjustment tool that allows firms to increase their short-term liquidity.", "sections": [ { "heading": "Mechanism: labor’s liquidity service", "content": "- When a time gap exists between production and its associated revenues, firing can function as a liquidity adjustment tool that allows firms to increase their short-term liquidity. The paper refers to this feature as \"labor's liquidity service.\"\n- The presence of firing costs reduces the value of labor's liquidity service, which affects firms' demand for liquidity and, consequently, firms' demand for inputs.\n- Firing costs therefore have effects both at the creation margin (reducing the value of labor as a liquidity buffer) and at the destruction margin (affecting layoffs and exit decisions)." }, { "heading": "Model and theoretical predictions", "content": "- The paper presents a model that formalizes how firing costs interact with firms' demand for liquidity when production revenues are delayed.\n- Prediction: The presence of firing costs has a stronger negative effect on production levels of firms facing liquidity constraints.\n- Prediction: Firing costs imply relatively higher destruction (exit or layoffs) for financially restricted firms due to reduced liquidity-adjustment capacity." }, { "heading": "Empirical strategy and evidence", "content": "- Regression analysis uses country-industry panel data sets to test the liquidity service effect of firing costs proposed by the model.\n- The empirical results reject the hypothesis that the effect of firing costs does not depend on the presence of financial restrictions.\n- Evidence shows a relatively stronger negative effect of firing costs on the output of:\n - industries with higher liquidity requirements, and\n - small firms." }, { "heading": "Key findings (bulleted)", "content": "- Firing can serve as a liquidity adjustment tool when revenues lag production; this is labeled \"labor's liquidity service.\"\n- Firing costs reduce the liquidity service value of labor, lowering firms' demand for liquidity and inputs.\n- Financially restricted firms experience relatively higher destruction in the presence of firing costs.\n- The negative impact of firing costs on production is stronger for firms facing liquidity constraints.\n- Regression evidence across country-industry panels supports the liquidity service mechanism.\n- The hypothesis that firing-cost effects are independent of financial restrictions is rejected.\n- The negative output effect of firing costs is relatively stronger in industries with higher liquidity requirements and among small firms." }, { "heading": "Policy implications", "content": "- Policies that change firing costs can alter firms' liquidity management incentives and therefore affect input demand and output, especially among financially constrained firms.\n- Consideration of firms' liquidity requirements is important when designing labor-market regulations: uniform changes in firing costs may have disproportionately large adverse effects on small firms and industries with higher liquidity needs.\n- Financial development and access to liquidity could mitigate the negative production impact of firing costs on constrained firms.\n\nSource: Herman Z Bennett, \"Labor’s Liquidity Service and Firing Costs\", IMF Working Papers 2007, Issue 120 (Pages: 34), DOI: https://doi.org/10.5089/9781451866841.001\n\n---\n\n Content in this bundle\n\n- Wp07120\n - Wp07120 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Wp07120 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937" } ], "bullets": [ "[Markdown version](/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937/index.md)", "[Structured JSON version](/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937/index.json)", "[Bundle manifest](/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937/bundle-manifest.json)", "Authors: Herman Z Bennett", "Published: May 1, 2007", "Series: IMF Working Papers", "DOI: https://doi.org/10.5089/9781451866841.001", "When a time gap exists between production and its associated revenues, firing can function as a liquidity adjustment tool that allows firms to increase their short-term liquidity. The paper refers to this feature as \"labor's liquidity service.\"", "The presence of firing costs reduces the value of labor's liquidity service, which affects firms' demand for liquidity and, consequently, firms' demand for inputs.", "Firing costs therefore have effects both at the creation margin (reducing the value of labor as a liquidity buffer) and at the destruction margin (affecting layoffs and exit decisions).", "The paper presents a model that formalizes how firing costs interact with firms' demand for liquidity when production revenues are delayed.", "Prediction: The presence of firing costs has a stronger negative effect on production levels of firms facing liquidity constraints.", "Prediction: Firing costs imply relatively higher destruction (exit or layoffs) for financially restricted firms due to reduced liquidity-adjustment capacity.", "Regression analysis uses country-industry panel data sets to test the liquidity service effect of firing costs proposed by the model.", "The empirical results reject the hypothesis that the effect of firing costs does not depend on the presence of financial restrictions.", "Evidence shows a relatively stronger negative effect of firing costs on the output of:", "Firing can serve as a liquidity adjustment tool when revenues lag production; this is labeled \"labor's liquidity service.\"", "Firing costs reduce the liquidity service value of labor, lowering firms' demand for liquidity and inputs.", "Financially restricted firms experience relatively higher destruction in the presence of firing costs.", "The negative impact of firing costs on production is stronger for firms facing liquidity constraints.", "Regression evidence across country-industry panels supports the liquidity service mechanism.", "The hypothesis that firing-cost effects are independent of financial restrictions is rejected.", "The negative output effect of firing costs is relatively stronger in industries with higher liquidity requirements and among small firms.", "Policies that change firing costs can alter firms' liquidity management incentives and therefore affect input demand and output, especially among financially constrained firms.", "Consideration of firms' liquidity requirements is important when designing labor-market regulations: uniform changes in firing costs may have disproportionately large adverse effects on small firms and industries with higher liquidity needs.", "Financial development and access to liquidity could mitigate the negative production impact of firing costs on constrained firms.", "**Wp07120**" ], "related": [ { "title": "Wp07120", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07120.pdf", "summary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07120.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07120.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937/index.md", "json": "/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937/index.json", "bundleManifest": "/en/publications/wp/issues/2016/12/31/labors-liquidity-service-and-firing-costs-20937/bundle-manifest.json" }, "generatedAtUtc": "2026-09-17T17:16:22.383Z" }