Firms’ Demand for Liquidity and Employment Decisions: Evidence from Australia

We explore the impact of firm’s constrained access to external finance on their employment decisions. The theory posits that in the presence of financial constraints, firms heavily rely on their internal finances. Thus, financial constraints are expected to have a negative impact on employment. Constrained firms are also expected to rely more on flexible forms of workers in order to better respond to uncertainties. The negative correlation between casual employment and firms' liquidity suggests a new interpretation to casualization. We test these hypotheses using Australian firm-level data. Casual employment may respond to an overall demand for liquidity rather than to flexibility concerns. Our results suggest a possible role for employment policies, besides the conventional stimulus, with more targeted outreach.