Authors: Davide Melcangi
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The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
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Staff Reports
The Marginal Propensity to Hire
Number 875
December 2018 Revised May 2022
December 2018 Revised May 2022
JEL classification: E24, E44, G01, G32
When financial constraints bind, firms adjust employment in response to cash flow shocks. A 2010 revaluation of business rates, a United Kingdom tax levied on business-occupied properties, implied that similar firms, occupying similar properties in narrow geographical locations, experienced different tax changes. I find that, on average, for every £1 of additional cash flow triggered by the tax change, 39 pence were spent on employment, with small and leveraged firms responding the most. A general equilibrium model with firm heterogeneity and financial frictions rationalizes these findings, and quantitatively determines the aggregate effects of a fiscal transfer to firms.
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