Trade credit, labor employment, and demand for skills: An empirical investigation of Vietnamese small and medium enterprises

Abstract

This paper examines the effect of firms' trade credit use on their labor demand and the composition of this labor demand in terms of skilled and unskilled workers. Our analysis is conducted on a rich data set of private manufacturing small and medium enterprises in Vietnam over the period of 2009–2013. We find strong and robust evidence that these firms recruit more workers when they receive trade credit offered from their suppliers. In addition, larger trade credit is associated with firms' higher propensity to hire skilled labor. We also find that the effect of trade credit on firms' labor market decision works through the investment channels, especially through those investment projects leading to the enhancement of firms' innovative capability. These findings highlight the role of trade credit regulations for job creation and economic development.